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THE    HANDBOOK    SERIES 


Agricultural  Credit 


DEBATERS' 
HANDBOOK  SERIES 

Enlargement  of  the   United  States  Navy 
(3d  ed.  rev.  and  enl.) 

Direct  Primaries     (3d  ed.  rev.  and  enl.) 

Capital  Punishment     (2d  ed.  rev.) 
>/  Commission    Plan    of    Municipal    Govern- 
ment    (3d  ed.  rev.  and  enl.) 

Election  of  United  States  Senators   (2ded. 
rev.) 

Income  Tax     (2d  ed.  rev.  and  enl.) 

V  Initiative  and  Referendum     (3d    ed.  rev. 

and  enl.) 
Central  Bank  of  the  United  States 
Woman  Suffrage     (2d  ed.  rev.) 
Municipal    Ownership     (2d    ed.    rev.  and 

enl.) 
Child  Labor    (2d  ed.  rev.  and  enl.) 
Open  versus  Closed  Shop     (2d  ed.) 
Employment  of  Women 

V  Federal  Control  of  Interstate  Corporations 

(2d  ed.  rev.  and  enl.) 
Parcels  Post     (2d  ed.  rev.  and  enl.) 

V  Compulsory  Arbitration  of    Industrial  Dis- 

putes    (2d  ed.  rev.  and  enl.) 

V  Compulsory  Insurance 
Conservation  of  Natural  Resources 
Free  Trade  vs.  Protection 
Government  Ownership  of  Railroads    (2d 

ed.  rev.  and  enl.) 
Reciprocity 
VTrade  Unions 
Recall     (2d  ed.  rev.  and  enl.) 
World  Peace 

Government  Ownership  of  Telegraph  and 
Telephone 

V  Single  Tax 
Monroe  Doctrine 

HANDBOOK  SERIES 

European  War 
Agricultural  Credit 


Other  titles  in  preparation 

Each  volume,  one  dollar  net 


THE    HANDBOOK    SERIES 


Agricultural  Credit 


Compiled  by 

EDNA    D.    BULLOCK 


THE  H.  W.  WILSON  COMPANY 
WHITE  PLAINS,  N.  Y.,  AND  NEW  YORK  CITY 

1915 


Published,   April,    1915 


EXPLANATORY  NOTE 

This  handbook  is  intended  as  a  source  of  information  on  a 
new  and  Httle  understood  question,  for  both  students  and  citizens. 

The  discussion  of  agricultural  credit  as  a  current  topic  is  so 
new  in  this  country  that  its  literature  is  limited  in  scope  chiefly 
to  descriptions  of  the  systems  of  rural  credit  in  vogue  in  other 
countries.  Consequently,  the  bibliography  is  limited,  although 
the  literature  of  the  subject  is  being  constantly  augmented. 

Tlie  chief  sources  of  information  on  this  subject  are  govern- 
ment documents.  Most  of  these  can  be  procured  by  the  individ- 
ual citizen  through  his  representative  or  senator  at  Washing- 
ton, or  by  purchase  at  a  few  cents  for  each  title  from  the 
superintendent  of  public  documents  at  Washington. 

E.  D.  B. 

September,   1914. 


CONTENTS 

Bibliography 

Books,  Pamphlets  and  Documents  ix 

Magazine  Articles    •. xiii 

Introduction    i 

Selected  Reprints 
>f  Herrick,  Myron  T.     Farmer  and  Finance.  .Atlantic  Monthly        3 
International  Institute  of  Agriculture.     Outline  of  European 

Co-operative  Credit  Systems 14 

Jenkins,    W.    H.     Financial    Help    for    American    Farmers. 

Craftsman       30 

Kemmerer,  E.  W.     Agricultural  Credit  in  the  United  States. 

American  Economic  Review      34 

■*>/ Lahman,  M.  S.     Rural  Credit North  American  Reviev^r      50 

Lubin,  David.     The  Landschaft ;  Co-operative  Rural  Credit      56 
Moss,    Ralph    W.     Low-Rate,    Long-Time    Money    for    the 

Farms World's   Work      65 

Nebraska  Farmers'  Congress Official  Yearbook,  1914      69 

Parr,  John.     Unfinancial   Farmer Everybody's       80 

Price,  H.  C.     How  European  Agriculture  Is  Financed 

Popular  Science  Monthly      88 

Robinson,  L.  G.     Scientific  Farming  and  Scientific  Financ- 
ing  Annals  of  the  American  Academy     102 

Rogers,  A.  L.     Farm  Credits 112 

Rural  Credits  and  Farm-Land  Banks Independent     116 

Sinclair,  John  F.     Co-operative  Credit 120 

Stockbridge,  F.  P.     Ready  Money  for  the  Farmer 

Hearst's    Magazine     124 

Taft,  William  H.     Letter  to  the  Governors  of  the  States  in 

Advocacy  of  Rural  Credit  Legislation 136 

United    States.     State    Department.     Information    Division. 

Preliminary  Report  on  Land  and  Agricultural  Credit  in 

Europe     _ 142 

Van  Cortlandt,  R.  B.     What  Is  Agricultural  Credit? 

North   American   Review     1 73 


BIBLIOGRAPHY 

An  asterisk    (*)   preceding  a   reference  indicates   that   the    entire   article 
or  a  part  of   it  has  been   reprinted  in  this  volume. 

l)ir.LI()GR.\PIIIES 

International  Co-operative  Alliance.  International  Co-operative 
Bibliography.   Credit,  p.  72-102.   Lond.  The  Alliance.     1906. 

Russell  Sage  Foundation  Library.  Bulletin  No.  5,  June,  1914. 
Co-operative   Credit. 

General  References 
Books,  Pamphlets  and  Documents 

American  Commission  to  Investigate  and  Study  Agricultural 
Credit  in  Europe.  Agricultural  Co-operation  and  Rural  Credit 
in  Europe ;  Report.  Part  I.  Observations.  Part  II.  Minority 
Report,  Observations  and  Recommendations.  (63d  Cong.  2d 
Sess.  Senate  Doc.  261.) 

American  Commission  to  Investigate  and  Study  Agricultural 
Credit  in  Europe,  and  United  States  Commission  to  Investi- 
gate Rural  Credit.  Report.  Part  I.  Agricultural  Co-operation 
and  Rural  Credit  in  Europe.  Part  II.  Bibliography.  (63d  Cong. 
2d    Sess.   Senate    Doc.    214.) 

Bailey,  L.  H.,  ed.  Cyclopedia  of  American  Agriculture.  Agri- 
cultural Credit.    E.  W.  Kemmerer.    v.  4. 

Bathrick,  E.  R.  Farm  Credits ;  Speech  in  the  House  of  Repre- 
sentatives, February  7,  1913.  Washington.  Government  Printer. 

Cahill,  J.  A.  Agricultural  Credit  and  Co-operation  in  Germany; 
Report  to  the  British  Board  of  Agriculture  and  Fisheries 
of  an  Inquiry  into  Agricultural  Credit  and  Agricultural  Co- 
operation in  Germany.    (63d  Cong,  ist  Sess.  Senate  Doc.  17.) 

Carver,  T.  N.  How  to  Use  Farm  Credit.  (U.  S.  Dept.  of  Agri- 
culture.    Farmers'  Bulletin  593.) 

May   be   secured   by   any   citizen.     Address   the    Department    of    Agricul- 
ture at  Washington. 


X  BIBLIOGRAPHY 

Coulter,  J.  L.  Problem  of  Rural  Credit,  or  Farm  Finance  in  the 
United  States.  Wisconsin  State  Board  of  Agriculture,  1913. 
(63d  Cong.  Special  Session.  Senate  Doc.  5.) 

Cunningham,  John,  and  Brown,  William  M.  Report  on  Rural 
Credits  and  Co-operation.    Columbus,  Ohio.     1914. 

Report   of   members    of   the   American    commission   to    investigate    rural 
credits. 

Davis,  Charles  Hall.  Davis  Plan  of  Rural  Banks,  State  and  Na- 
tional.    (63d  Cong.  1st  Sess.  Senate  Doc.  141.) 

Davis,  Charles  Hall.  Rural  Banking  and  Currency  Reform.  (63d 
Cong.  1st  Sess.  Senate  Doc.  140.) 

Dos  Passos,  John  R.  Farm  Credits.  (62d  Cong.  3d  Sess.  Senate 
Doc.  looi.) 

DuFourmantelle,  Maurice.  Agricultural  Credit;  General  Theory 
of  Co-operative  Credit  in  France  and  Other  Foreign  Countries, 
tr.  from  the  French  by  Pauline  Carter  Biddle.  1912.  (62d 
Cong.  2d  Sess.  Senate  Doc.  572.) 

Fay,  C.  R.   Co-operation  at  Home  and  Abroad.   Macmillan.   1908. 

Fletcher,  D.  U.  Work  of  the  American  Commission  Respecting 
Agricultural  Finance,  Organization,  Co-operation  and  Better- 
ment of  Rural  Conditions.  1913.  (63d  Cong,  ist  Sess.  Sen- 
ate Doc.  177.) 

Address  to  the  House  of  Governors,  Colorado  Springs,  August  26,    19 13. 

Glenn,  Mrs.  M.  W.  B.  Development  of  Thrift.  Chapter  V.  Peo- 
ple's Banks.    Macmillan.    1900. 

Haney,  Lewis  H.  Need  and  Possibility  of  Co-operative  Rural 
Credit  in  Texas.  (University  of  Texas.  Bulletin  No.  298. 
October  8,  1913.  pp.  10-5). 

Hare,  B.  B.  Long  Time  Farm  Loans ;  Address  before  the  Con- 
ference for  Common  Good  Held  at  Columbia,  S.  C,  on 
August  6-7,  1913.    (63d  Cong.  2d  Sess.  Senate  Doc.  421.) 

Haskin,  Frederic  J.  Rural  Credits.  (63d  Cong.  2d  Sess.  Senate 
Doc.  200.) 

Herrick,  M.  T.,  and  Ingalls,  R.  Rural  Credits:  Land  and  Co- 
operative.   Appleton.     1914. 

Hobson,  O.  R.  Agricultural  Credit  Banks,  Reprinted  from  the 
Journal  of  the  Institute  of  Bankers,  London,  June,  1912. 
(62d  Cong.  2d  Sess.  House  Doc.  891.) 

Same  article.     Congressional   Record  48:10273-8.  Jl.    26,   '12. 

Hodges,  LeRoy.  Notes  on  Agricultural  Credit  Systems  Abroad. 
(62d  Cong.  3d  Sess.  House  Doc.  1435.) 


BIBLIOGRAPHY  xi 

International  Institute  of  Agriculture.  Adaptation  of  the  Euro- 
pean Credit  System  to  Meet  the  Needs  of  the  American 
Farmer.     1912.     (62d  Cong.  2d  Sess.  Senate  Doc.  855.) 

*International  Institute  of  Agriculture.    Outline  of  the  European 
Co-operative  Credit  Systems.    Ed.  2.    Rome.    1913. 
Reprinted  as  Senate  Doc.   574,  62d  Cong.   2d  Sess. 

International  Institute  of  Agriculture.  Monographs  on  Agri- 
cultural Co-operation  in  Various  Countries,   v.  i.   Rome.    191 1. 

International  Institute  of  Agriculture.  "Way  out  of  the  Rut"; 
European  Co-operative  Rural  Credit  Systems.  (62d  Cong. 
3d   Sess.  Senate  Doc.  966.) 

New  International  Yearbook,  1913.    Agricultural  Credit. 

Jay,  Pierre.  Co-operative  Credit;  Origin  of  the  Movement.  (In 
National  Federation  of  Remedial  Loan  Associations.  Pro- 
ceedings, 1910:  3-12.) 

Also    published    in    National    Conference    of    Charities    and    Corrections. 
(Proceedings,    1910:439-50.) 

Jewish  Agricultural  and  Industrial  Aid  Society.  Annual  Report, 
1900-date. 

Kemmerer,  E.  W.  Report  on  the  Advisability  of  Establishing 
a  Government  Agricultural   Bank  in  the   Philippines. 

Kniffin,  H.  W.  and  Muhleman,  M.  L.  Agricultural  Credit  Banks 
of  the  World.     Banking  Law  Journal  Company.     1913. 

Lubin,  David.  Co-operative  Rural  Credit  in  Canada ;  Opinion 
on  the  Recommendations  of  the  Saskatchewan  Commission ; 
the  Landschaft.  A  Letter  to  the  Hon.  Walter  Scott,  Premier 
of  Saskatchewan,  Canada.  International  Institute  of  Agri- 
culture, Rome.     1913. 

*Lubin,    David.      The   Landschaft;    Co-operative    Rural    Credit; 
a  Letter  to  Senator  Duncan  U.   Fletcher.     International  In- 
stitute of  Agriculture. 
First  printed  as  Senate  Doc.   123,  63  Cong,    ist  Sess. 

Lund,  Mrs.  Haviland  H.  Rural  Credits ;  Hearings  before  the 
Subcommittee  on  Banking  and  Currency,  Dec.  lo,  1913. 

May  be  obtained  by  addressing  a  congressman   or   senator. 

National  Rural  Banking  System ;  Outline  of  a  Plan  to  Establish 
a  Rural  Banking  System  in  the  United  States  as  Proposed  by 
the  Bill.   S.  2909.    (63d  Cong,  ist  Sess.  Senate  Doc.  158.) 

*Nebraska  Farmers'  Congress.    Official  Yearbook,  1914. 

New  York  (State).    Delegates  on  the  American  Commission  for 


xii  BIBLIOGRAPHY 

the   Study   of   Agricultural  Co-operation   in   Europe.    Special 

Report.     1914.     (N.   Y.    (State).     Dept.   of   Agriculture.   Bul- 
letin 56.) 
New  York  (State).  Governor.  Message  of  Governor  Martin  H. 

Glynn    Recommending    Agricultural    Credit    Legislation    for 

New  York,  March  2,  1914. 
Peters,  E.  T.   Co-operative  Credit  in  Certain  European  Countries 

and  Their  Relation  to  Agricultural   Interests.     1892.     (U.   S. 

Dept.     of     Agriculture.      Statistics     Division.      Aliscellancous 

Series.    Report,  No.  3.) 
Powell,   G.   Harold.    Co-operation   in   Agriculture.    Chapter   XI. 

Rural  Credit.    Macmillan.    1913. 
Price,  H.  C.    Rural  Credit  in  Germany.    Ohio  State  University. 

1913- 
Robinson,    Leonard   G.    Agricultural   Activities   of   the   Jews    in 

America.     1912. 

Reprinted  from  the  American  Jewish  Yearbook. 

^Rogers,  A.  L.  Agricultural  and  Vocational  Education  and 
Farm  Credits;  Letters.    (63d  Cong,  ist  Sess.  Senate  Doc.  164.) 

Saskatchewan,  Canada.  Agricultural  Credit  Commission.  Re- 
port.   1913. 

An  official  summary  of  this  report  was  also  published. 

*Sinclair,  John  F.  Co-operative  Credit.  (Wisconsin.  Board  of 
Public  Affairs.  Report  upon  Co-operation  and  ^Marketing. 
Pt.   2.    1912.) 

Contains  a  bibliography   by   W.   E.   Jillson. 

Stewart,  Charles  L.  Analysis  of  Rural  Banking  Conditions  in 
Illinois.    1914. 

*Taft,  William  Howard.  Letter  to  Governors  of  States  in  Ad- 
vocacy of  Agricultural  Credit  Legislation.  1912.  (62d  Cong. 
3d  Sess.  Senate  Doc.  967.) 

Published  also  in   the  Proceedings   of   the   Governors'    Conference,    1912, 
and  in  newspapers  on  October   12,   1912. 

Trenckmann,  W.  Co-operative  Agricultural  Credit.  (University 
of  Texas.  Bulletin.  No.  298.    October  8,  1913.    pp.  16-35.) 

United  States.  Department  of  Agriculture.  Yearbook,  1912. 
Agricultural   Credit,   pp.   25-30. 

United  States.  Commission  to  Investigate  Agricultural  Credit. 
National  Farm-land  Banks.  Interpretation  of  H.  R.  12585,  a 
Bill  to  Establish  Farmland  Banks.  63d  Cong.  2d  Sess.  House 
Doc.  679.) 


BIBLIOGRAPHY  xiii 

United  States.  Commission  to  Investigate  Agricultural  Credit. 
Land-mortgage  or  Long-term  Credit ;  Personal  or  Short- 
term  credit.    1914.    (63d  Cong.  2d  Sess.  Senate  Doc.  380.  Pts. 

1-3.) 

United  States.  National  Monetary  Commission.  Canadian  Bank- 
ing System.  Co-operative  People's  Banks  of  Canada,  pp.  149- 
73.    Alphonse  Desjardins. 

*United  States.  State  Department.  Information  Division.  Pre- 
liminary Report  on  Land  and  Agricultural  Credit  in  Europe, 
Including  the  Letter  of  President  W.  H.  Taft  to  the  Gov- 
ernors of  the  States,  and  the  Recommendations  of  Myron  T. 
Herrick  in  Connecticut  with  the  Proposal  of  President  Taft 
to  Introduce  Co-operative  Credit  in  the  United  States.  1912. 
(62d   Cong.  3d   Sess.    Senate   Doc.   No.  967.) 

Wolff,  Henry  W.  People's  Banks.  London.  P.  S.  King  and  Son. 
1910. 

Magasine  Articles 

*American    Economic    Review.     2:852-72.    D.    '12.     Agricultural 

Credit  in  the  United  States.     E.  W.  Kemmerer. 
*Annals  of  the  American  Academy.  46:  167-77.  ^li".  '13.    Scientific 

Farming  and  Scientific  Financing.    Leonard  G.  Robinson. 
^Atlantic  Monthly.  111:170-8.  F.  '13.    Farmer  and  Finance.    My- 
ron T.  Herrick. 
Bankers'  Magazine.  78 :  922-32.  Je.  '09.    Co-operative  or  People's 

Bank.    Alphonse  Desjardins. 
Congressional  Record.  48:  11724-42.  Ag.  14,  '12.    Rural  Credits  in 

Europe ;  Speech  by  D.  U.  Fletcher. 
*Craftsman.  24:334-5.  Je.  '13.   Co-operative  Farm  Credits.   W.  H. 

Jenkins. 
*Ever}'body's.  31  :  61-4.  Jl.  '14.    Unfinancial  Farmer.    John  Parr. 
Harper's  Magazine.  127:549-59.  S.  '13.    Every  Farmer  His  Own 

Capitalist.     J.  L.  Mathews. 
Harper's   Magazine.   127:724-34.   O.  '13.    Capitalizing   Character. 

J.    L.   Mathews. 
*Hearst's  IMagazine.  23:417-25.  Mr.   '13.    Ready  Money  for  the 

Farmer.     Frank  Parker  Stockbridge. 
^'^Independent,  yj :  185-6.  F.  9,  '14.    Rural  Credit  and  Farm  Land 

Banks. 


xiv  BIBLIOGRAPHY 

International  Institute  of  Agriculture.  Bulletin,  v.  i-date.  Sep- 
tember, 1910  to  date. 

*North  American  Review.  199:585-8.  Ap.  '14.  What  Is  Agri- 
cultural Credit?    R.  B.  Van  Cortlandt. 

*North  American  Review.  199 :  796-800.  My.  '13.  Rural  Credit. 
M.  S.  Lahman. 

^Popular  Science  Monthly.  82:252-63.  ]\Ir.  '13.  How  European 
Agriculture  is  Financed.     H.  C.  Price. 

Real  Estate  Magazine.  4:38-9.  F.  '14.  Co-operative  and  Land 
Credits.     E.  N.  Breitung. 

^World's  Work.  26:623-5.  O.  '13.  Low-rate,  Long-time  Money 
for  the  Farms.     Ralph  W.  Moss. 


INTRODUCTION 

The  well  known  reluctance  of  the  American  farmer  to  or- 
ganize effectively  for  the  promulgation  of  his  own  social  and 
economic  interest  is,  doubtless,  largely  responsible  for  the  fact 
that  he  pays  more  for  the  use  of  money  needed  in  his  business 
than  does  the  merchant  in  the  city. 

Changes  in  the  system  responsible  for  this  condition  are 
being  advocated.  The  weight  of  argument  seems  to  be  with 
those  who  favor  some  form  of  co-operative  credit.  There  are, 
however,  niany  who  have  doubts  as  to  the  ability  of  American 
farmers  to  adjust  themselves  to  co-operative  schemes.  Other 
plans  are  proposed — some  of  them  involving  a  government  sub- 
sidy. 

Bills  now  pending  before  congress  do  not  promise  to  crys- 
talize  into  law  soon.  The  condition  of  European  farmers  has 
been  inquired  into,  and  a  voluminous  report  made,  but  it  seems 
to  be  difficult  to  convince  the  American  legislator  that  conditions 
in  this  country  are  essentially  similar  to  those  described  in  these 
comprehensive   reports. 

There  is  need  for  much  study  on  this  subject.  The  popular 
mind  conceived  the  notion  that  the  bills  pending  before  Congress 
proposed  to  lend  money  to  farmers  for  little  or  nothing.  The 
editor  of  a  leading  magazine  deplored  the  proposition  to  make 
credit  easier  for  the  farmer  to  obtain,  arguing  that  borrowing 
would  be  unduly  encouraged  and  real  thrift  become  obsolete. 

It  is  not  improbable  that  conditions  in  this  country  may  be- 
come more  and  more  like  those  of  older  countries.  Farms  may 
become  smaller,  and  support  a  denser  population.  Intensive  and 
scientific  cultivation  will  take  the  place  of  present  methods. 
The  co-operative  idea  will  appeal  more  strongly  to  a  dense  popu- 
lation. 

September,  1914.  Edna  D.  Bullock. 


SELECTED  ARTICLES 

Atlantic    Monthly.     111:170-8.     February,    1913. 
The  Farmer  and  Finance.     Myron  T.  Herrick. 

From  1900  to  1910  the  population  of  the  United  States  in- 
creased twenty-one  per  cent ;  during  the  same  period  the  num- 
ber of  farms  increased  only  ten  and  five  tenths  per  cent ;  which 
indicates  that,  in  the  ten  years,  rural  population  increased  about 
one-half  as  much  as  the  total  population.  In  1909  the  per-capita 
production  of  cereals  was  only  forty-nine  and  one  tenth  bushels ; 
in  1899  it  was  fifty-eight  and  four  tenths, — a  decrease  of  nine 
bushels  per  head  in  ten  years.  Between  1899  and  1909  the  ag- 
gregate production  of  cereals  increased  only  one  and  seven 
tenths  per  cent,  but  their  market  value  was  higher  by  seventy- 
nine  and  eight  tenths  per  cent  in  1909  than  in  1899, — the  in- 
crease in  price  being  forty-seven  times  the  increase  in  quantity. 
In  1900  there  was  one  farm  for  every  thirteen  and  two  tenths 
persons ;  in  1910  there  was  one  farm  for  every  fourteen  and 
five  tenths  persons.  On  the  average,  •  therefore,  each  farm  now 
has  to  furnish  food  for  more  than  one  more  person  than  in  1900. 
In  1900,  there  were  five  and  five  tenths  acres  of  improved  farm 
land  per  capita  of  population ;  by  1910  the  per  capita  improved 
acreage  had  declined  to  five  and  two  tenths  acres. 

These  figures  make  it  clear  why  the  exports  of  food-stufifs 
in  crude  condition,  and  food  animals,  have  decreased  from 
$227,300,000  or  16.59  per  cent  of  the  total  exports,  for  the  fiscal 
year  of  1900,  to  $99,900,000,  or  only  4.6  per  cent  of  the  total  for 
the  fiscal  year  of  1912 ;  and  why  similar  imports  have  increased 
from  $68,700,000  in  1900,  to  $180,120,000  in  1912.  Of  course  the 
splendid  crops  of  this  year  will,  for  the  time  being,  alter  the 
tendency  of  imports  of  food-stufifs  to  increase  and  of  exports  to 
decrease,  but  unfortunately  experience  indicates  that  another 
bumper  crop  is  not  likely  for  several  years.  Regardless  of  other 
influences  the  increasing  disparity  between  the  supply  of  and 
demand  for  food-stufifs,  as  shown  by  the  foregoing  data,  would 


4  SELECTED   ARTICLES 

seem  almost  to  furnish  an  adequate  explanation  of  the  fact  that 
on  October  i,  1912,  Bradstreet's  index  number  of  prices  made 
a  new  high  record  of  $9.4515. 

Surprising  as  it  may  seem,  it  is  within  the  last  few  years  that 
the  people  of  the  United  States  have  recognized  the  danger  that 
lies  in  the  increasing  prices  of  food.  The  uneasiness  with  which 
the  rise  in  the  prices  of  necessities  is  now  regarded  is  amply 
justified,  for  if  there  is  a  further  considerable  advance,  a  lower- 
ing of  the  standard  of  living  of  a  great  number  of  the  American 
people,  with  its  certain  inimical  consequences  to  the  quality  of 
our  citizenship,  is  bound  to  occur.  It  is  largely  the  apprehension 
of  this  possibility  that  has  impelled  the  national  government, 
the  states,  various  associations  and  individuals,  to  undertake 
the  promotion  of  scientific  farming,  to  the  end  that  the  output 
of  the  farms  of  this  country  may  be  raised  to  a  maximum  con- 
sistent with  economic  production  and  the  conservation  of  the 
vital  qualities  of  the  soil.  Educational  activity  of  this  sort  is 
excellent  and  necessary,  and  should,  if  possible,  be  continued 
with  greater  enthusiasm.  However,  agriculture  is  similar  to 
other  industries  in  that  knowledge  alone  is  not  sufficient  for 
success.  Like  those  engaged  in  other  kinds  of  business,  farmers 
must  have  capital,  in  addition  to  knowledge  and  skill,  and  it  is 
highly  important  that  they  obtain  the  capital  they  need  on  terms 
consistent  with  their  credit. 

What  is  being  done  to  promote  better  farming,  through  edu- 
cation and  the  establishment  of  land-  and  agricultural-credit 
institutions,  is  due  to  the  great  importance  of  the  industry,  and 
not  to  any  lack  of  intelligence  on  the  part  of  the  farmers  them- 
selves. There  is  no  more  reason  to  assume  that  farmers  are 
incapable  of,  or  indifferent  to,  progress  than  there  is  to  assume 
that  bankers  are  deficient  because  they  operate  under  a  faulty 
and  inadequate  banking  system.  The  farmers  of  the  United 
States  are  the  intellectual  superiors  of  the  farmers  in  any  other 
country  in  the  world,  and,  with  equal  facilities,  they  will  set 
the  pace  in  scientific  agriculture. 

A  superficial  knowledge  of  agricultural  conditions  in  the 
United  States  is  all  that  is  necessary  to  understand  that  the  par- 
ticular pressing  need  of  American  farmers  is  financial  machin- 
ery whereby  the  potential  credit  that  they  possess  in  abundance 
can  be  made  negotiable.     There  is  in  this  country  a  serious  lack 


AGRICULTURAL   CREDIT  5 

of  financial  institutions  suited  to  supply  farmers  with  funds.  In 
this  respect  the  United  States  is  the  most  backward  of  any  of  the 
important  nations  of  the  world,  and,  consequently,  it  is  safe  to 
say  that  this  is  the  prime  reason  why  this  country  is  so  far  be- 
hind many  other  countries  in  the  per-acre  production  of  food- 
stufifs.  The  average  yield  of  grain  in  the  United  States  is  about 
fifty  per  cent  less  than  it  is  on  the  continent  of  Europe,  and  the 
average  per-acre  yield  of  potatoes  is  not  more  than  thirty  per 
cent  of  what  it  is  in  Germany.  The  most  striking  and  im- 
portant difference  between  farming  conditions  here  and  in  many 
European  countries,  is  that  there  farmers  can  readily  obtain  the 
funds  they  need,  whereas  in  this  country  agricultural  financing 
is   difficult  and  costly. 

In  its  capital  requirements,  farming  is  not  unlike  other  in- 
dustries, and  it  is  like  other  industries  in  that  unless  these 
capital  requirements  are  supplied,  progress  will  be  slow  and 
dubious.  Like  the  merchant  and  the  manufacturer,  the  farmer 
needs  funds :  first,  for  the  purchase  of  property  and  for  its  per- 
manent improvement ;  and  second,  for  temporary  purposes, — such 
as  financing  crops.  These  two  general  divisions  of  agricultural 
capital  requirements  should  be  preserved  in  the  nature  of  the 
loans  that  are  made  to  secure  funds.  Each  of  these  two  divi- 
sions can  and  should  support  its  own  credit,  known  respectively 
as  land  credit  and  agricultural  credit.  For  the  purpose  of  buying 
land  and  making  permanent  improvements,  farmers  should  be 
able  to  make  mortgage  loans  which  have  a  long  time  to  run,  and 
which  they  can  gradually  repay  by  small  yearly  installments. 
Money  invested  in  land  or  permanent  improvements  becomes 
fixed  capital,  and  the  proportion  of  a  farmer's  income  that  can 
be  attributed  to  this  sort  of  capital  is  so  limited  that  it  is  illogi- 
cal and  unreasonable  to  expect  the  money  so  invested  to  be  re- 
paid except  after  a  considerable  period  of  years.  The  maxi- 
mum length  of  a  farm  loan  in  this  country  is  from  three  to 
five  years,  and,  at  the  end  of  that  time,  it  may  or  may  not  be  pos- 
sible to  secure  a  renewal.  As  a  rule,  a  farm-mortgage  loan  here 
has  a  very  restricted  market,  and,  consequently,  the  borrower 
frequently  is  obliged  to  pay  an  unreasonable  rate  of  interest,  and 
to  submit  to  burdensome  conditions  from  which  the  nature  of 
the  security  he  has  to  offer  entitles  him  to  be  exempt. 

Until  some  way  is  provided  by  which  farm  mortgages  can  be 


6  SELECTED   ARTICLES 

made  the  basis  of  a  long-time  security,  with  the  marketable  quali- 
ties of  a  railroad  or  industrial  bond,  and  which  can  be  sold  at 
a  price  very  nearly  determined  by  the  soundness  of  the  security, 
the  farmers  of  this  country  will  continue  to  be  burdened  by  the 
terms  they  must  accept  in  making,  mortgage  loans.  That  it  is 
possible  to  create  a  security  of  this  sort  is  shown  by  the  success 
of  the  mortgage-loan  companies  and  associations  of  foreign 
countries,  whose  obligations  sell  on  a  basis  as  favorable  as  that 
of  bonds  of  the  most  successful  railroad  and  industrial  corpora- 
tions. The  farmers  of  the  United  States  have  as  good  a  claim 
to  cheap  money  as  have  railroad  and  industrial  corporations, 
because  farm  land  constitutes  as  good  security  as  a  railroad  or 
a  factory.  The  marvelous  and  rapid  development  of  the  rail- 
roads of  the  country,  to  a  very  large  extent,  is  due  to  the  low 
cost  at  which  they  have  been  able  to  obtain  vast  sums  of  money 
for  purposes  of  development.  There  is  absolutely  no  reason  why 
just  as  cheap  money  should  not  be  similarly  available  for  the 
acceleration  of  agricultural  development. 

For  the  financing  of  temporary  capital  requirements,  the  per- 
[  sonal  credit  of  farmers  should  be  made  available.  A  farmer 
should  not  be  obliged  to  mortgage  his  land  to  obtain  funds  to 
operate  his  property.  As  in  the  case  of  mortgage  loans,  the 
facilities  in  this  country  for  making  negotiable  the  personal 
credit  of  farmers  are  inadequate.  There  is  no  reason  why  the 
industrious,  capable  farmer  should  not  be  able  to  borrow  on 
his  personal  obligation  as  easily  as  does  the  merchant.  A  few 
American  farmers  do  a  banking  business  on  a  scale  sufficiently 
large  to  make  them  desirable  clients  of  local,  state,  and  national 
banks,  but,  for  the  great  majority,  it  is  exceedingly  difficult,  if 
not  impossible,  to  secure  the  personal  credit  accommodation  they 
need,  and  to  which  their  responsibility  entitles  them. 

The  success  of  foreign  rural  cooperative  banking  associa- 
tions in  reducing  the  rate  of  interest  on  loans  to  farmers,  and 
the  almost  negligible  amount  that  has  been  lost  through  the 
operations  of  these  associations,  clearly  indicates  that  the  high 
rate  of  interest  that  farmers  in  this  country  must  pay,  is  due, 
not  to  any  inherent  weakness  in  their  credit,  but  to  the  lack  of 
properly  organized  facilities  for  making  their  credit  negotiable. 
The  lack  of  agricultural  banking  facilities  is  a  tremendous  hard- 
ship for  the  farmers.     It  means  that  they  are  laboring  under  a 


AGRICULTURAL    CREDIT  7 

handicap  which  those  engaged  in  no  other  kind  of  industry  have 
to  bear.  Under  present  arrangements,  farmers  are  paying  two, 
two  and  a  half,  and  three  per  cent  more  for  money  than  they 
should.  Upon  the  enormous  amount  of  borrowed  funds  that  the 
farmers  of  this  country  are  obliged  to  employ,  the  excessive 
interest  amounts  to  a  sum  so  large  that  if  it  could  be  saved  and 
expended  in  increasing  the  productivity  of  our  farms,  it  would 
do  much  toward  solving  the  problem  of  inadequate  crops. 

Fortunately,  in  the  attempt  to  establish  banking  facilities  for 
the  farmers  of  the  United  States,  it  is  not  necessary  to  work  in 
the  dark.  Many  of  tlie  farm-credit  institutions  of  other  coun- 
tries are  established  on  principles  so  broad  and  sound  that,  with 
some  modifications,  they  can  be  adapted  to  conditions  in  this 
country.  It  is  important,  therefore,  to  know  all  we  can  of  for- 
eign land-  and  agricultural-credit  institutions. 

Germany  is,  perhaps,  the  country  where  agriculture  is  the 
most  thoroughly  and  most  intelligently  organized.  There  are 
organizations  in  Germany  for  the  purpose  of  supplying  farmers 
with  capital,  and  organizations  for  carrying-  on  nearly  all  of  the 
operations  connected  with  the  cultivation  of  the  soil — all  owned 
and  managed  by  the  farmers  themselves.  These  organizations 
have  revolutionized  agricultural  conditions  in  Germany.  They 
not  only  have  been  the  means  of  immensely  increasing  the  pro- 
ductivity of  the  farms,  but  have  also  wonderfully  improved  the 
economic  and  social  status  of  the  farmers  themselves.  The  first 
kind  of  agricultural  cooperative  organization  started  in  Ger- 
many was  for  credit  or  banking  purposes,  and  the  entire  fabric 
of  agricultural  cooperation  in  Germany  now  rests  on  its  elab- 
orate and  efficient  system  of  credit  societies.  Consequently  it 
is  reasonable  to  assume  that  these  credit  societies  are  responsi- 
ble for  the  advanced  condition  of  agriculture.  Agricultural 
credit  in  Germany  is  based  on  the  principles  of  self-help  and 
cooperation. 

In  those  European  countries  where  land-  and  agricultural- 
credit  facilities  are  the  most  complete,  as  a  rule,  long-time 
mortgage  loans  and  short-time  personal  loans  are  made  by 
different  institutions  organized  along  different  lines.  Of  the  two 
kinds  of  credit  institutions,  perhaps  the  most  successful  and 
efficient  are  the  Raiffeisen  banks  in  Germany  and  the  Credit 
Foncier  in  France.    These  two  institutions  differ  in  many  essen- 


8  SELECTED   ARTICLES 

tial  particulars.  A  Raiffeisen  bank  is  a  mutual  association,  the 
Credit  Foncier  is  an  incorporated  company;  the  Raiffeisen  banks 
loan  for  the  most  part  on  personal  obligations,  the  Credit  Foncier 
on  first  mortgages ;  the  Raiffeisen  banks  secure  most  of  their 
funds  through  the  deposits  of  the  farmers  themselves,  the  Credit 
Foncier,  through  the  debenture  bonds  that  it  issues,  obtains  funds 
for  its  loans  from  the  conservative  investors  of  all  classes.  It 
is  because  of  these  and  other  characteristic  differences,  and  by 
reason  of  the  wonderful  success  of  these  two  institutions,  that  a 
knowledge  of  how  the  Raiffeisen  banks  and  the  Credit  Foncier 
operate,  and  what  they  have  accomplished,  is  peculiarly  illumi- 
nating and  profitable.  Each  of  these' two  types  of  credit  organ- 
izations possesses  many  features  well  adapted  for  systems  of 
farm-credit  institutions  in  this  country. 

The  Raiffeisen  banking  system  was  founded  by  Frederick 
William  Raiffeisen  primarily  for  the  purpose  of  freeing  small 
farmers  from  the  exactions  of  usurers.  Raiffeisen  knew  nothing 
of  finance,  but  he  did  understand  the  needs  of  those  who,  under 
the  most  discouraging  circumstances,  were  bravely  trying  to  gain 
a  living  from  the  soil — a  class  among  whom  credit  was  the  par- 

j  ticular  and  essential  thing  lacking.     Sir  Horace  Plunkett,   who 
has  done  so  much  for  the  agricultural  development  of  Ireland, 

'  has  said  that  the  establishment  of  the  Raiffeisen  banks  was  sec- 
ond in  economic  importance  only  to  the  discovery  of  steam. 

The  Raiffeisen  banking  system  is  based  on  the  principle  of 
combining  borrowers,  to  the  end  that  by  association  they  may 
secure  credit  facilities  which,  as  individuals,  it  would  be  impos- 
sible for  them  to  obtain.  The  fundamental  provisions  of  the 
Raiffeisen  banks,  as  contemplated  by  Herr  Raiffeisen,  were  those 
of  gratuitous  management,  unlimited  liability  of  members,  and 
a  strictly  local  field  of  operation.  For  the  most  part  the  Raiffei- 
sen banks  adhere  to  those  provisions.  The  membership  of  the 
banks  is  made  up  almost  exclusively  of  farmers.  In  1909  the 
number  of  members  for  each  bank  averaged  92.  In  the  begin- 
ning the  Raiffeisen  banks  had  no  capital  stock,  but  in  1876  a  law 
was  passed  which  made  it  necessary  for  them  to  issue  shares  of 
stock.  The  value  of  the  shares  was  fixed  at  what  was  little  more 
than  a  npminal  amount.  In  1909  the  average  paid-up  capital 
per  member  was  only  19  marks.  The  dividends  that  the  Raiffei- 
sen banks  can  pay  are   strictly   limited — in  no  event  can   they 


AGRICULTURAL   CREDIT  9 

exceed  the  rate  of  interest  charged  on  loans.  In  1909  these 
banks  made  a  net  profit  in  excess  of  7,000,000  marks,  but  of  this 
only  13  per  cent  was  paid  out  in  dividends — the  balance  being 
passed  to  the  credit  of  the  reserve  fund.  Because  of  the  nature 
of  its  business  the  sphere  of  operation  of  each  bank  is  very  lim- 
ited. It  is  necessary  for  the  members  to  know  each  other,  and 
to  know  for  what  purpose  each  loan  is  made,  and  to  see  that 
the  money  is  so  used.  The  Raiffeisen  banks  have  done  much  to 
encourage  thrift,  because  they  have  supplied  a  new  incentive 
for  saving.  Inasmuch  as  the  successful  management  of  these 
banks  requires  a  keen  sense  of  responsibility  on  the  part  of  the 
individual  members,  their  moral  effect  is  very  considerable. 
Through  their  membership  in  the  Raiffeisen  banks  many  Ger- 
man farmers  have  become  familiar  with  the  nature  and  uses  of 
credit  and  have  acquired  a  knowledge  of  business.  Altogether, 
these  small  rural  banks  have  much  improved  the  financial 
position  and  the  moral  and  intellectual  calibre  of  their  mem- 
bers. 

Because  of  its  small  size  and  restricted  field  of  operation,  the 
management  of  a  Raififeisen  bank  is  very  simple  and  inexpensive. 
In  1909,  the  average  cost  of  management  per  bank  was  only 
638  marks.  The  funds  that  the  banks  have  to  loan  to  their  mem- 
bers are  made  up  of  the  proceeds  of  the  sale  of  capital  stock, 
the  reserve  accumulated  from  profits,  deposits, — both  savings  and 
current  account, — and  loans  from  the  central  cooperative  banks, 
from  other  banks,  and  from  individuals.  In  1909,  88  per  cent 
of  these  funds  consisted  of  the  deposits  of  the  farmers  them- 
selves.    The  size  of  the  average  deposit  is  about  $370. 

The  loans  which  these  banks  make  are  either  on  current 
account — a  form  of  over-draft  often  used  by  European  banks — 
or  for  fixed  periods.  There  is  a  tendency  to  extend  the  practice 
of  making  loans  on  current  account,  as  that  seems  to  be  the  form 
best  suited  for  members.  As  a  rule  the  loans  made  by  the  Raif- 
feisen banks  are  for  a  short  period — usually  for  one  year,  with  a 
maximum  of  five.  For  the  most  part  the  loans  are  granted  on 
the  personal  obligations  of  the  borrowers,  to  which  usually  is 
added  the  guaranty  of  one  or  two  associate  members.  Occasion- 
ally loans  are  secured  by  deposit  of  collateral,  or  by  mortgages. 
The  average  loan  of  the  Raififeisen  banks  in  Germany  is  about 
$150.     As  the  small  size  of  the  average  loan  indicates,  the  Raif- 


10  SELECTED   ARTICLES 

feiseu    lianks    ])riinaril>'     are     institiilidiis     lur     snpijlyin.L;"    credit 
accommodations    to   the    small    landowner. 

The  Raiffeiscn  l)anking  system  in  Germany  now  comprises 
about  15,000  local  banks,  witli  a  membership  of  approximately 
2,000,000.  These  banks  are  now  doing  a  yearly  aggregate  busi- 
ness of  about  $1,500,000,000.  The  local  Raiffeisen  banks  are 
grouped  under  35  provincial  banks,  which,  in  turn,  are  affiliated 
with  two  general  central  cooperative  banks.  The  local  banks  • 
borrow  money  from  the  provincial  banks,  when  required,  and 
also  loan  to  them  their  surplus  funds.  The  provincial  central 
banks  are  cooperative  societies,  with  limited  liability,  and  they 
occupy  much  the  same  position  toward  the  local  rural  banks 
that  the  latter  do  toward  their  members.  Their  working  capital 
is  made  up  of  the  paid-up  shares  of  their  members  (the  local 
banks),  of  the  deposits  of  the  local  banks,  and  of  loans  from 
other  banks.  By  means  of  these  provincial  and  central  coopera- 
tive banks,  agricultural  credit  in  those  parts  of  Germany  where 
these  banks  operate  possesses  the  element  of  fluidity  in  a  re- 
markable degree — moving  from  those  localities  where  it  is  not 
needed  to  those  where  it  is  needed.  Altogether  the  Raiffeisen 
banks  of  Germany  make  up  a  wonderfully  efficient  organization, 
which,  by  supplying  an  enormous  amount  of  agricultural  credit, 
has  revolutionized  farming  in  Germany. 

Up  to  the  middle  of  the  last  century,  France  was  almost  en- 
tirely lacking  in  land-  and  agricultural-credit  facilities.  As  a 
result  of  much  agitation  there  was  passed  in  1852  a  law  provid- 
ing for  land-mortgage  banks,  and  under  this  the  Credit  Foncier 
was  organized.  Because  of  the  success  of  the  Landschaften  in 
Germany,  many  of  the  principles  and  methods  of  these  associa- 
tions were  incorporated  in  the  French  law.  The  Credit  Foncier 
is  unlike  the  Landschaften  in  the  very  important  particular  that 
it  is  an  incorporated  company,  not  a  cooperative  association.  The 
Credit  Foncier  has  a  capital  of  200,000,000  francs  and  operates 
under  the  supervision  of  the  state.  In  the  beginning  (1852)  the 
government  granted  the  Credit  Foncier  a  subsidy  of  10,000,000 
francs,  in  order  to  help  it  make  loans  at  a  rate  advantageous  for 
that  time.  The  subsidy  was  not  renewed,  and  the  state  does  not 
now  intervene,  except  occasionally,  to  exercise  control.  The 
Credit  Foncier  possesses  many  special  privileges,  pertaining  to 
the  issuance  of  bonds  and  to  its  loans,  that  give  it  a  practical, 


AGRICULTURAL   CREDIT  ii 

if  not  a  legal  monopoly  of  the  kind  of  business  in   which   it  is 
engaged. 

The  purposes  of  the  Credit  Foncier  arc  :— 

1.  Lending  money  to  landowners,  counties,  communes,  and 
public  services. 

2.  Creating  and  negotiating  mortgage  bonds,  or,  more  prop- 
erly, debentures,  to  a  value  which  cannot  exceed  the  amount  of 
the  sums  due  from  its  borrowers. 

3.  As  a  necessary  accessory  to  its  principal  business,  the 
Credit  Foncier  has  the  right  to  carry  on  ordinary  banking  opera- 
tions, within  well-defined  limits,  and,  in  that  connection,  it  is  per- 
mitted to  receive  deposits ;  but  the  aggregate  of  deposits  must 
not  exceed  100,000,000  francs. 

A  large  part  of  the  funds  received  on  deposit  is  employed 
in  discounting  commercial  bills,  on  condition  that  they  have  two 
signatures  and  do  not  run  over  three  months.  The  shares  of  the 
Credit  Foncier,  which  are  dealt  in  on  the  Bourse,  are  issued  at 
five  hundred  francs,  and  any  one  can  own  them.  The  stock  now 
receives  six  per  cent  dividends,  and  sells  for  about  750  francs  a 
share.  The  government  appoints  the  governor  and  two  sub-gov- 
ernors, who,  by  virtue  of  their  office  are  members  of  the  Council 
of  Administration.  There  must  also  be  three  treasurers-general 
— state  officials — among  the  23  members  of  the  Council  of  Ad- 
ministration. These  treasurers  are  appointed  by  the  general  as- 
sembly of  the  company,  but  before  presenting  their  names  to 
the  assembly  it  is  customary  to  obtain  the  approval  of  the  Min- 
ister of  Finance.  The  general  assembly  represents  all  the  stock- 
holders, and  is  composed  of  tlie  two  hundred  who  own  the  larg- 
est amount  of  stock.  These  stockholders  meet  once  each  year 
to  ratify  the  accounts,  vote  the  dividend,  and  dispose  of  such 
other  business  as  may  properly  be  presented  to  them.  The  gen- 
eral assembly  elects  a  Council  of  Administration  of  23  members. 
The  governor  has  a  right  to  veto  the  acts  of  both  the  general 
assembly  and  the  Council,  but  there  are  only  a  very  few  instances 
on  record  of  his  having  used  this  power.  The  Council  of  Ad- 
ministration meets  once  each  week,  and,  among  other  things, 
passes  upon  all  loans. 

The  two  principal  kinds  of  loans  made  by  the  Credit  Foncier 
are  mortgage  loans  and  communal  loans,  and  its  total  outstand- 
ing loans  now  amount  to  about  4,000,000,000  francs.     So  far  as 


12  SELECTED   ARTICLES 

this  country  is  concerned,  that  part  of  its  operations  covering  the 
making  of  mortgage  loans  to  landowners  is  of  the  greatest  inter- 
est. Our  municipalities  now  have  a  broad  and  steady  market  for 
their  securities. 

The  Credit  Foncier  makes  loans  to  landowners  on  the  follow- 
ing terms : — 

1.  Short-time  loans,  witliout  amortization,  for  a  period  of 
from  one  to  nine  years. 

2.  Long  time  loans,  with  annual  amortization,  for  a  period 
of  from  ten  to  seventy-five  years. 

The  rate  of  interest  on  these  loans  is  4.30  per  cent  at  the  pres- 
ent time,  and  the  rate  is  the  same  for  all  kinds  of  property. 
The  rate  charged  on  a  loan  must  not  exceed  the  rate  at  which 
money  is  obtained  from  the  sale  of  bonds  by  more  than  six 
tenths  of  one  per  cent.  Loans  are  made  only  on  first-mortgage 
security,  and  the  amount  of  the  loan  cannot  exceed  one  half 
of  the  value  of  the  property,  except  that  loans  on  wine  and 
timber  lands  must  not  exceed  one  third  of  their  value.  When 
the  loan  is  made  for  a  short  period,  the  borrower  pays  each  year 
only  the  amount  of  interest  due,  and  the  principal  sum  must  be 
paid  in  full  at  the  end  of  the  term  of  the  loan — from  one  to 
nine  years.  Long-time  loans  are  amortized ;  that  is  they  are 
gradually  paid  by  means  of  an  annuity,  which  includes  the  inter- 
est and  a  small  fraction  of  the  principal.  As  a  rule,  the  bor- 
rower himself  fixes  the  length  of  time  that  the  loan  is  to  run. 
The  amortization  extends  over  the  whole  period  of  the  loan,  so 
that  the  total  of  the  interest  and  capital  amount  is  repaid  from 
a  constant  yearly  annuity.  Consequently,  the  cost  of  amortiza- 
tion depends  on  the  length  of  the  loan,  and  on  the  rate  of  inter- 
est. On  a  loan  running  for  seventy-five  years  at  4.30  per  cent 
interest,  the  annuity — including  interest  and  amortization — is 
at  the  rate  of  4.48  per  cent  per  annum.  The  borrower  has  the 
right  to  pay  the  principal  of  the  loan  at  any  time,  and  to  profit 
by  the  amortization  already  made.  He  can  also  make  partial 
payments  and  thereby  reduce  the  amount  of  the  annuity. 

The  bonds  issued  by  the  Credit  Foncier  have  no  fixed  ma- 
turity, but  are  called  for  payment  by  lot.  Each  payment  of  bonds 
must  be  of  such  an  amount  that  the  bonds  remaining  in  circula- 
tion do  not  exceed  the  balance  of  the  principal  owed  upon  the 
hypothecated  loans.     If  the  government  approves,  there  can  be 


AGRICULTURAL   CREDIT  13 

added  to  the  bonds  called  for  payment  certain  prizes  and  premi- 
ums. The  funds  received  from  the  usual  amortization,  or  antici- 
pated payments,  must  be  used  to  amortize  or  redeem  bonds,  or  to 
make  new  loans.  In  general  the  bonds  bear  3  per  cent  on  the 
nominal  capital,  and  the  total  cost  of  recent  loans  to  the  company, 
including  interest,  prizes,  and  premiums,  is  about  3.60  per  cent. 
The  bonds  are  sold  by  public  subscription,  and  may  be  paid  for 
in  instaHments.  About  every  three  years  the  company  issues 
bonds  sufficient  to  yield  from  300,000,000  to  350,000,000  francs. 
The  bonds  are  subscribed  for  by  people  of  small  means,  and 
usually  remain  in  their  hands ;  consequently  the  quotations  of 
the  bonds  show  little  fluctuation — less  than  French  railway  bonds. 
The  company  always  keeps  a  few  bonds  on  hand  for  sale,  but 
the  bulk  of  them  are  disposed  of  by  public  subscription. 

The  Credit  Foncier  has  departed  from  its  original  purpose 
to  the  extent  that  at  the  present  time  a  very  large  part  of  its 
loans  are  made  on  urban  real  estate.  However,  this  is  simply 
an  incident,  and  does  not  reflect  on  the  applicability  of  the  prin- 
ciples on  which  the  Credit  Foncier  is  founded,  to  an  institution 
confining  its  operations  to  loans  on  rural  land. 

In  view  of  the  wonderful  success  of  the  Credit  Foncier  and 
kindred  institutions,  it  is  hard  to  understand  why  the  principle 
of  debenture  bonds,  secured  by  long-time  real-estate  loans,  pay- 
able by  amortization,  should  not,  long  ago,  have  been  put  in 
practice  in  this  country.  The  business  of  loaning  money  on 
farm  mortgages  in  the  United  States  is  still  carried  on  in  a 
primitive  way.  We  are  still  making  farm-mortgage  loans  for 
such  short  periods  that  frequent  renewals — often  very  embar- 
rassing to  debtors — are  inevitable.  The  existence  of  facilities 
whereby  farm-mortgage  loans  could  be  made  for  long  terms — 
say  fifty  years  or  more,  with  provision  for  easy  payment  by 
amortization — would  be  a  wonderful  boon  to  American  farmers, 
and  a  decided  stimulant  to  the  development  of  efficient,  sc^'entific 
farming. 

Neither  the  Raiffeisen  banks  nor  the  Credit  Foncier  involve 
strange  financial  principles.  In  this  country,  the  splendid  record 
of  the  mutual  savings  banks  proves  that  cooperation  can  be  safely 
and  wisely  applied  in  banking.  We  are  familiar  with  the  prin- 
ciple of  debenture  bonds,  and  we  know  something  of  the  prin- 
ciple of  amortization.     Of  course,  it  is  impossible  to  pick  up  any 


14  SELECTED   ARTICLES 

of  tlic  foreign  farm-credit  systems,  out  of  its  social  setting,  and 
say,  offhand,  tliat  it  would  be  as  successful  in  this  country.  The 
history  and  success,  as  well  as  the  details  of  organization,  of 
every  one  of  the  foreign  farm-credit  systems  have  been  very 
largely  determined  by  the  temperament,  the  social  and  economic 
status  of  the  people,  and  by  the  conditions  of  climate  and  soil 
of  the  country  in  which  they  are  situated.  Consequently  in  work- 
ing out  the  plans  of  agricultural-  and  land-credit  systems  for 
this  country,  we  must  be  cautious  in  our  adherence  to  foreign 
models.  We  must  remember  that  the  value  and  success  of  every 
institution  depends  upon  its  being  in  harmony  with  its  en- 
vironment. 

The  importance  of  adequate  credit  facilities  for  our  farmers 
is  beginning  to  be  keenly  appreciated.  The  American  Bankers 
Association,  the  Southern  Commercial  Congress,  and  other  or- 
ganizations, are  doing  splendid  pioneer  work  by  agitating  the 
need  of  an  agricultural  banking  system,  and  by  disseminating 
information  as  to  what  has  been  accomplished  abroad. 

The  establishment  of  agricultural-  and  land-credit  systems 
in  this  country  is  not  a  political  question ;  it  is  an  economic  ques- 
tion of  the  gravest  import — the  proper  solution  of  which  demands 
a  patriotic  national  purpose  and  constructive  ability  of  a  high 
order. 


International  Institute  of  Agriculture.     Outline  of  European 
Co-operative   Credit   Systems. 

Chapter  11.   Popular  Banks  in  Germany:  The   Schulze-Delitzsch 

System. 

These  banks,  which  were  formed  before  the  rural  banks  and 
served  as  models  for  the  first  banks  founded  by  Raiffeisen,  as- 
sisted largely  at  the  beginning  of  the  co-operative  movement  to 
combat  usury  even  in  the  country.  Even  now,  notwithstanding 
the  great  development  of  the  rural  banks,  they  are  largely  util- 
ised by  farmers,  many  of  whom  belong,  as  we  shall  now  see,  to 
the  banks  themselves. 

While  Raiffeisen  adapted  co-operation  to  the  needs  and  to 
the  mental  attitude  of  the  farmers,  Schulze-Delitzsch  devised 
organisations   specially  suited  to  the  needs  and  economic  char- 


AGRICULTURAL   CREDIT  15 

acter  of  town-dwellers.  The  Schulze-Delitzsch  hanks  have, 
therefore,  unlike  the  rural  hanks,  a  large  range  of  husiness  in 
an  extended  area  of  operations;  they  accumulate  a  considerable 
quantity  of  capital  and  they  distribute  fairly  high  dividends. 
They  do  not  follow  the  principle  of  unpaid  management ;  on  the 
contrary,  their  management  is  rather  costly  and  is  conducted  on 
strict  business  lines.  They  are  based  more  often  than  the  rural 
banks  on  limited  lialiility  and  they  carry  on  a  series  of  banking 
operations  which  the  rural  banks  only  undertake  exceptionally, 
if  at  all.  In  fact  their  business  approaches  more  closely 
than  that  of  the  rural  banks  to  banking  business  properly  so- 
called. 

The  greater  number  of  the  Schulze-Delitzsch  banks  are  affili- 
ated to  a  general  federation,  of  which  we  shall  speak  in  due 
course.  The  number  of  banks  afiiliated  to  this  federation  in- 
creased from  904  in  1901,  to  952  in  191 1,  while  the  membership 
increased  during  the  same  period  from  527,000  to  620,000 ;  the 
loans  granted  in  1901  amounted  to  2,525,500,000  marks,  while  the 
loans  granted  in  191 1  amounted  to  4.427,900,000  marks. 

There  exist  also  a  certain  number  of  independent  banks,  un- 
attached to  the  Federation,  which,  however,  furnish  to  the  latter 
statistics  for  arrangement  and  publication  in  its  Year-book.  Of 
1,051  banks  which  furnished  particulars  of  their  working  in  191 1 
to  the  Federation,  952  were  affiliated  to  the  Federation,  and  99 
were  independent  of  it.  The  particulars  which  follow  refer 
(except  where  otherwise  indicated)  to  the  1,051  banks,  including 
in  this  way  the  popular  banks  which,  though  not  belonging  to  the 
Federation,  have  furnished  it  with  returns. 

I.     Organization   of  the  Popular  Banks 

There  are  marked  differences  between  the  popular  banks  and 
the  rural  banks,  both  in  regard  to  the  character  of  the  members 
and  to  the  size  of  their  shares. 

Membership. — The  average  membership  of  the  popular  banks 
in  191 1  was  639,  a  figure  considerably  higher  than  the  average 
for  rural  banks. 

Whilst  the  rural  banks  draw  their  members  chiefly  from 
farmers,  the  Schulze-Delitzsch  Banks  include  members  of  vari- 
ous occupations. 

In  the  following  figures  are  shown  by  percentages  the  dif- 


i6  SELECTED   ARTICLES 

fcrent  classes  which  composed  the  membership  of  the  popular 
banks  at  the  beginning  of  1912. 

1.  Independent  agriculturists  (farmers,  etc.) 26.61 

2.  Wage-earning  agriculturists  (laborers,  etc.) 2.42 

3.  Artisans     22.80 

4.  Merciiants,  manufacturers,  etc 19.00 

5.  Workmen,  apprentices  and  wage-earners  generally 11.30 

6.  Professional  men,  civil  servants,  clerks,  etc 9.09 

7.  Persons    living    on    pensions    or    possessing   independent 

means 8.78 

100.00 

The  class  most  largely  represented  are  the  independent  agri- 
culturists, who  are  usually  farmers  cultivating  small  or  medium- 
sized  holdings.  Next  come  the  artisans.  These  two  classes 
together  furnish  about  half  the  total  membership.  Considering 
the  members  from  the  point  of  view  of  social  status,  we  may 
say  that  the  popular  banks  contain  principally  persons  belonging 
to  the  lower  middle  classes,  without,  however,  excluding  either 
the  working  classes  or  the  persons  who,  like  civil  ser- 
vants, manufacturers,  etc.,  occupy  a  higher  social  and  economic 
position. 

Women  formed  11.5  per  cent  of  the  total  members  and  by 
this  figure  also — relatively  a  high  one — is  shown  how  wide  a 
field  of  action  these  banks  have. 

Liability. — In  1911,  out  of  the  952  banks  embraced  by  the 
National  Federation,  563  (that  is,  59.1  per  cent)  were  based 
on  unlimited  liability,  385  (or  40.5  per  cent)  on  limited  liability, 
and  4  only  (0.4  per  cent)  were  constituted  with  unlimited  liability 
to  make  supplementary  payments. 

Although  the  system  of  limited  liability  is  steadily  increas- 
ing, unlimited  liability  is  still  considered  the  best  system  on 
which  to  establish  popular  banks  in  districts  which  are  not  yet 
familiar  with  co-operative  credit. 

Shares. — The  shares  of  the  members  are,  as  we  have  already 
remarked,  rather  high.  The  General  Congress  of  the  Popular 
Banks  of  1896  at  Wiesbaden  recommended  that  the  shares  should 
be  at  least  300  marks.  A  subsequent  Congress  recommended  for 
banks  with  limited  liability  a  minimum  of  500  marks,  limiting 
the  liability  of  the  members  to  three  times  the  amount  of  the 
shares. 

In  point  of  fact  in  740  of  the  banks  affiliated  to  the  National 
Federation  the  shares  were  of  a  nominal  value  equal  or  superior 


AGRICULTURAL   CREDIT  17 

to  300  marks.  It. is  not  necessary  that  the  shares  be  paid  for  in 
one  sum :  they  may  be  paid  for  by  the  members  in  monthly 
instalments. 

Towards  payment  for  the  share  or  shares  subscribed  by  a 
member  are  placed,  in  addition  to  the  monthly  instalments,  any 
dividend  which  becomes  due  to  him  on  a  division  of  profits. 
Only  w^hen  the  share  is  fully  paid  up  does  he  receive  such  divi- 
dend in  cash.  The  prospect  of  receiving  dividends  in  cash  in- 
cites the  member  to  make  every  effort  to  complete  his  payments 
in  the  least  possible  time,  and  thus  become  the  actual  owner  of 
capital,  albeit  on  a  modest  scale. 

The  average  paid-up  capital  per  member  (not  the  nominal 
value  of  the  shares,  which  is  generally  a  round  figure)  is  368 
marks,  but  there  is  a  constant  tendency  to  increase  it.  If  we 
regard  indeed  only  the  banks  affiliated  to  the  National  Federa- 
tion, for  which  we  have  a  longer  series  of  comparable  figures, 
we  find  that  in  1882  the  average  was  22;^  marks,  increasing  suc- 
cessively to  226  marks  in  1892  and  to  276  in  1902,  and  reaching 
in  191-1  to  364  marks,  which  is  slightly  less  than  the  figure  for 
the  total  of  all  the  banks  together. 

2.  The  Business  of  the  Popular  Banks 
Working  capital. — The  aggregate  working  capital  of  the  pop- 
ular banks  was  nearly  1,668,000,000  marks  at  the  end  of  191 1, 
giving  the  truly  remarkable  average  of  1,587,298  marks  per  bank. 
This  average,  which  shows  the  financial  importance  of  the  popu- 
lar banks,  is  the  result  of  a  continuous  upward  movement.  If 
we  consider  again  only  those  banks  affiliated  to  the  National 
Federation  we  find  that  in  1886  it  was  only  617,000  marks;  in 
1898  it  rose  to  800,000  marks  and  in  1902  it  reached  a  million. 
In  the  last  tw-enty  years  the  aggregate  funds  at  the  disposal  of 
the  popular  banks  has,  therefore,  been  trebled. 

Examining  the  sources  from  which  these  funds  are  derived, 
we  find  the  following  figures  in  191 1  : 
The  bank's  own  funds : 

Percentage 

of  Total 

Working 

Marks.  Capital. 

Share   capital   247,294,344  14.8 

Reserve   funds    105,799,673  6.4 

Total  353,094,017  21.2 


i8  SELECTED   ARTICLES 

Capital  from  outside  sources  :  „ 

Marks.  Percentage 

Private  deposits    1,276,172,048  76.5 

Debts   contracted   with    banks    or   associ- 
ations      38,984,086  2.3 

Total  1,315,156,134  78.8 

Total   working  capital 1,668, 250, 151>  100.0 

The  proportion  of  the  banks'  own  funds  (21.2  per  cent)  is, 
therefore,  appreciably  higher  than  in  the  case  of  the  rural  banks. 

In  opposition  to  Raiffeisen,  who  wished  to  exclude  share- 
capital  altogether,  Schulze-Delitzsch  proposed  to  furnish  capital 
for  the  popular  banks  exclusively  from  the  banks'  own  means. 

Seeing  that  this  was  unattainable  he  held,  later  on,  that  it 
was  necessary  that  the  share  capital  should  form  a  third  of  the 
working  capital.  The  propaganda  for  increasing  tlie  amount  of 
owned  capital  continues  at  the  present  time.  The  tendency  is 
hampered  in  a  marked  degree  bj-  the  fact  that  the  higher  the 
ratio  of  the  bank's  own  funds  to  the  total  working  capital,  the 
lower  becomes  the  ratio  of  net  profits  to  share  capital,  and  the 
lower,  therefore,  the  dividends. 

In  addition,  while  by  the  payment  of  a  reasonable  interest  a 
very  large  capital  may  fairly  easily  be  attracted  from  outside 
sources,  the  accumulation  of  directly  owned  capital  proves  a 
much  slower  and  more  difficult  operation.  So  that,  instead  of 
the  desired  increase  in  the  ratio,  there  is  to  be  observed  in  recent 
years  a  slight  decrease. 

The  private  deposits  are  usually  distinguished  as  "savings 
deposits"  and  "ordinary  deposits."  According  to  this  distinction 
the  first  class  comprises  deposits  of  small  amounts  coupled  with 
long  notice  of  withdrawal :  the  second,  deposits  of  large  sums 
or  for  shorter  periods.  Now,  however,  such  a  distinction  is  be- 
coming little  more  than  a  formal  one,  and  in  the  returns  the  two 
classes  are  grouped  together. 

To  the  capital  furnished  by  banks  and  associations  indicated 
in  the  preceding  table  it  would  strictly  speaking  be  necessary 
to  add  the  sums  which  the  banks  acquire  by  re-discounting  with 
third  parties  the  bills  which  they  have  discounted  for  their 
members. 

At  the  end  of  1911  there  were  in  circulation  bills  for 
51,497,470   marks,    so    that   including   also   this    item    among   the 

^$397,418,550,  or    £81,661,670. 


AGRICULTURAL   CREDIT  19 

outside  capital  we  have  a  grand  total  for  such  capital  of 
^,366,653, 604  marks. 

Loans  and  Investincuis. — So  far  we  have  dealt  with  the  work- 
ing capital  of  the  banks.  We  must  now  examine  the  use  made 
by  them  of  the  funds  placed  at  their  disposal  by  their  creditors. 

Since  the  object  of  the  banks  is  to  supply  credit  for  their  own 
members,  they  should  in  theory  confine  themselves  to  the  single 
function  of  granting  loans  to  members  under  varying  forms. 
For  two  reasons  this  does  not  happen. 

Evidently  it  can  never  be  the  case  that  the  funds  on  hand  in 
the  banks  exactly  balance  the  demands  for  credit  which  they 
receive. 

Just  as  in  the  case  where  their  own  funds  or  the  funds 
drawn  from  their  members  (the  bank's  own  capital  and  deposits) 
are  insufficient  they  are  compelled  to  draw  from  outside  sources, 
so,  in  the  parallel  case  in  which  there  is  a  surplus  of  such  funds, 
they  have  to  seek  outside  fields  of  investment. 

In  the  second  place  they  are  bound  to  create  for  themselves  a 
reserve  fund  for  the  safety  of  their  own  operations  in  the  case 
of  the  insolvency  of  their  members  or  the  sudden  withdrawal  by 
the  meml)ers  of  their  deposits. 

We  must,  therefore,  distinguish  between  the  loans  granted  to 
members,  and  the  loans  made  to  third  parties  under  the  many 
forms  familiar  to  banking.  That  is  to  say,  on  the  one  hand, 
"loans,"  strictly  so-called,  and,  on  the  other,  "investments." 

Examining  the  balance-sheets  of  the  banks  it  appears  that  at 
the  end  of  igii  out  of  assets  of  100  marks,  17. i  consist  of  invest- 
ments, according  to  this  distinction,  and  the  remaining  82.9  marks 
of  loans  to  members  outstanding. 

The  composition  of  the  assets  is  seen  from  the  figures  which 

follow : 

Marks.  Percentage. 

Loans  for  fixed  periods 469,660,330  28.0 

Loans  on  current  account 544,065,524  32  4 

Discount  of  commercial  bills 218,997.012  13.1 

Mortgages  and  otlier  land  credits 158,086,387  9.4 

Investments    286,051,023  17.1 

Total    1,676,860,2761  100.0 

Before  referring  in  detail  to  the  loans,  we  may  remark  that 

the  assets  included  under  the  heading  "Investments"   comprise 

cash  in  hand,  deposits  with  banks  and  associations  to  the  extent 

*■  $399,469,695,    or    £82,083,140. 
3 


20  SELECTED   ARTICLES 

of  71  million  marks,  first-class  bills  (bankers'  acceptances)  to 
20,800,000  marks,  shares  or  bonds  to  108,200,000  marks,  and  real 
property  to  58,400,000  marks.  This  last  includes  office  buildings 
to  the  value  of  30,700,000  marks,  and  other  real  property  of  which 
the  banks  have  assumed  possession  as  security  for  loans  granted, 
to  the  extent  of  27,700,000  marks. 

As  we  have  seen  from  the  figures  given  the  popular  banks 
transact  four  kinds  of  credit  operations — advances  for  fixed 
periods,  advances  on  current  account,  bill-discounting,  and  loans 
on  mortgage. 

The  banks  being  for  the  most  part  urban  in  character  and 
conducting  business  in  comparatively  advanced  districts,  the  cur- 
rent account  loans,  as  we  might  expect  to  find,  fixed  the  long- 
period  loans,  whereas  the  opposite  is  true  of  the  rural  banks. 

With  regard  to  fixed  period  loans,  these  are  only  in  the  most 
exceptional  cases  granted  without  guarantee.  The  amount  so 
lent  forms  barely  1.9  per  cent  of  the  aggregate  fixed-period 
loans.  The  guarantee  usually  demanded  is  either  a  special 
guarantee  in  the  form  of  pledges  or  a  personal  guarantee  in  the 
form  of  sureties.  Loans  on  personal  guarantee  form  86.7  per 
cent  of  the  total  loans.  The  popular  banks  in  fact  are  designed 
to  meet  the  needs  of  those  classes  who  are  not  in  a  position  to 
furnish  the  securities  necessary  for  doing  business  with  the 
ordinary  banks.  The  remaining  11.4  per  cent  of  the  amount  ad- 
vanced is  guaranteed  by  pledges. 

The  borrower  may  give  as  receipt  for  the  debt  his  simple 
note  of  hand  (Sclnildschein)  or  a  bill.^  The  employment  of  bills 
in  this  connection  is  one  of  the  characteristics  of  the  Schulze- 
Delitzsch  system.  He  wished  in  this  way  to  train  the  debtors 
of  the  bank  to  punctuality  in  business,  and  to  simplify  the  col- 
lecting of  interest. 

Finally  the  popular  banks  having  familiarised  their  customers 
with  the  use  of  bills  have  succeeded  in  diffusing  the  business  of 
bill-discounting,  of  which  we  shall  treat  further  on,  and  do  a 
huge  total  business  in  receiving  bills  which  are  made  use  of  by 
the  "Syndicate  for  Receipts  and  Circulation"  to  which  also  we 
shall  in  turn  refer. 

The  period  of  the  loan  is  fixed  as  a  rule  at  three  months. 

1  Accommodation-bills  {Vorschussu.'echsel)  are  here  referred  to,  and 
must  not  be  confused  with  commercial  bills,  to  which  we  shall  refer  later. 


AGRICULTURAL   CREDIT  21 

But  this  term  may  be  considerably  extended  by  renewals,  which, 
however,  are  conditional  on  the  repayment  in  cash  of  at  least 
ID  per  cent  of  the  amount.  In  the  case  of  bills  falling  due  the 
renewal  is  effected  by  the  creation  of  another  bill  for  a  lower 
amount.  This  system  of  gradual  extinction  of  debt  accustoms  the 
member  to  punctuality  in  his  dealings  and  makes  repayment  easier. 

Loans  on  current  account  are  not  made,  as  in  the  preceding 
case  for  a  fixed  amount  and  a  fixed  term,  but  are  loans  for 
which  a  maximum  is  fixed  within  which  at  any  time  the  borrower 
may  obtain  credit  from  the  banks.  He  is  also  free  to  make 
repayment,  total  or  partial,  at  any  time,  and  may  also  make 
deposits  in  current  account  beyond  the  amount  of  the  debt. 
The  loans  may  be  guaranteed  by  sureties,  by  goods  or  other 
effects,  or  by  mortgages. 

Discount  refers  to  commercial  bills  which  actually  represent 
dealings  in  goods.  They  must  be  paid  on  falling  due  in  their 
entirety  and,  therefore,  not  only  afford  extensive  security  to  the 
popular  banks  but  may  in  turn  be  re-discounted  with  other  insti- 
tutions when  it  is  necessary  to  increase  the  working  capital. 

It  may  easily  be  understood  that  mortgages  and  other  land- 
credit  instruments  can  form  but  a  small  proportion  of  the  busi- 
ness of  the  banks,  since  they  have  not  at  their  disposal  capital 
adapted  to  this  form  of  investment. 

Nor  is  it  possible  to  determine  when  the  banks  are  dealing 
with  genuine  mortgage  business  and  not  merely  with  mortgages 
accepted  as  additional  security  for  loans  granted  under  other 
forms. 

Profits  and  Losses. — The  gross  profits  realized  in  igii 
amounted  to  89,700,000  marks.  Of  this  sum  50,700,000  was  re- 
quired to  pay  the  interest  on  capital  from  outside  sources.  The 
gross  profits  represented  5.29  per  cent  of  the  total  working 
capital;  the  sums  paid,  however,  by  way  of  interest  on  borrowed 
capital  represented  only  3.86  per  cent  of  the  working  capital.  The 
banks,  therefore,  are  successful  in  procuring  the  capital  they 
employ  at  a  fairly  cheap  rate,  and  work  upon  a  margin  of  interest 
which  allows  them  a  fair  profit  without  pressing  unduly  on  their 
debtors.  From  this  margin  must  still  be  deducted  the  manage- 
ment expenses,  which  in  the  year  indicated  exceeded  14,000,000 
marks.  The  figure  represents  16.27  per  cent  of  the  gross  profits 
and  0.09  per  cent  of  the  total  business  done  (incomings  and  out- 


22  SELECTED  ARTICLES 

goings).  The  net  profit  available  for  distribution,  after  deduct- 
ing interest  on  borrowed  capital,  general  expenses,  depreciation, 
and  the  various  losses  was  over  22,000,000  marks  (including  the 
balance  brought  forward  from  the  previous  year).  This  figure 
represents  8.45  per  cent  of  the  share  capital  and  1.26  per  cent  of 
the  working  capital. 

While  in  the  case  of  the  rural  banks  the  great  bulk  of  the 
net  profit  is  placed  to  the  reserve  fund,  in  the  popular  banks 
29.7  per  cent — not  a  high  proportion — was  devoted  to  the  reserve 
in  191 1.  About  60  per  cent  of  the  net  profit — 13,000,000  marks — 
was  distributed  among  members  in  dividends,  and  the  residue 
was  spent  in  aid  of  the  propaganda,  in  works  of  public  utility, 
and  in  bonuses  to  employees. 

As  we  have  seen,  the  popular  banks  distribute  comparatively 
high  dividends.  The  dividends  must  indeed  form  an  inducement 
and  a  reward  to  the  subscriber  of  capital,  inciting  and  helping 
the  member  to  acciuire  a  small  capital  of  his  own  by  the  payment 
in  full  of  his  share.  It  is  calculated,  in  proportion  to  the  amount 
actually  paid  up  on  the  member's  share  or  shares. 

Out  of  906  co-operative  credit  institutions  affiliated  to  the 
National  Federation  which  have  returned  information  on  this 
point,  753,  or  more  than  two-thirds,  distributed  dividends  rang- 
ing between  5  and  7  per  cent.  Glancing  at  the  extreme  cases 
below  and  above  this  average,  we  find  2  banks  which  have 
distributed  in  dividends  only  2  per  cent,  while  14  reached  10 
per  cent,  one  bank  paid  18  per  cent,  and  one  25  per  cent.  But 
as  may  be  seen  these  cases  of  high  dividends  are  altogether 
exceptional  and  occur  in  those  banks  where  the  proportion  of 
share-capital  to  total  working  capital  is  low. 

3.     Statistics   of  the   Popular  Banks 

The  statistical  returns  of  the  popular  banks  "for  191 1  refer  to 
the  following  affiliated  and  non-affiliated  banks : 


.    "      "  Number 

of 
banks. 
Affiliated  to  the  National  Federation.    952 
Not   affiliated    to   the    National    Fed- 
eration             99 

Total    1.051  671,797  378.059 


Number 

of   members 

who  have 

taken   part 

Number 

in  the 

of 

credit 

members. 

business. 

620,660 

354,852 

51,137 

23,207 

AGRICULTURAL   CREDIT  23 

It  is  worth  noting  how  these  banks  really  apply  co-operative 
principles  in  relation  to  their  members.  Alore  than  half  of  the 
members  took  advantage,  during  the  course  of  the  year,  of  the 
credit  facilities  which  they  offered. 

The  following  table  contains  the  most  important  data  relating 
to  the  business   done  by  the  popular  banks   federated  and  non- 
federated  in  191 1. 
Business  Done  by  the  Popular  Banks  in  191 1  (including  Returns 

from  99  Banks  not  Affiliated  to  the  National  Federation 

Average  per 

Total  bank 

Marks.  Marks. 
Total   business    done    (incoming's    and 

outgoings)    16,343,938,5941  15,806,5172 

Working  capital  1,668,250,151  1,587,298 

Paid-up  share  capital 247,294,344  235,294 

Reserve  funds   105,799,673  100,666 

Deposits  at  end  of  year 1,276,172,048  1,214,246 

Loans  outstanding  at  end  of  year 1,390,809,253  1,323,318 

Loans  granted  during  the  year 4,647,752,9713  4,422,219 

4.  Federations  and   Central   Institutions  of  the  Popular   Banks 

(a)     FEDERATIONS 

The  great  majority  of  the  Schulze-Delitzsch  banks  are  affili- 
ated to  provincial  federations  (32  in  number),  which  in  turn  are 
affiliated  to  the  General  Federation  of  German  Co-operative 
Societies. 

The  provincial  federations  include,  besides  the  urban  co- 
operative credit  societies,  co-operative  distributive  societies, 
co-operative  productive  societies  and  co-operative  building  so- 
cieties. In  1912  the  federations  embraced  1,551  co-operative 
societies,  of  which  985  were  credit  socities,  293  distributive  so- 
ceties,  65  productive  societies  and  208  building  societies. 

(b)       CENTRAL    INSTITUTIONS 

For  the  popular  banks  the  need  of  central  banks  has  not  been 
felt  so  strongly  as  for  the  rural  banks.  The  popular  banks  have, 
in  fact,  by  their  very  nature,  greater  facilities  for  obtaining 
access   to   the   open   money   market,   and   the   promoters   of   the 

^$3,893,531,421,   or    £800,043,8755. 

-  Figures  are  obtainable  for  1,034  banks  only  (939  affiliated,  95  un- 
affiliated). In  calculating  the  average  only  the  banks  which  furnish  returns 
have  been   considered. 

'-'  $1,107,209,999,  or    £227,509,806. 


24  SELECTED   ARTICLES 

movement  even  hold  that  to  be  bound  closely  to  specific  central 
banks  would  be  a  hindrance  rather  than  an  advantage  to  the 
development  of  their  business.  Up  to  now  three  provincial 
federations  have  established  central  banks.  These  banks  are 
companies  with  limited  liability.  Their  importance  is  not  great. 
To  equalise  the  funds  of  the  popular  banks  there  exists  a 
special  institution,  the  Syndicate  for  Circulation,  which  supple- 
ments the  work  of  a  special  section  of  the  Dresden  Bank,  with 
which  the  co-operative  societies  have  current  accounts  so  as  to 
facilitate  the  movement  of  their  funds  and  to  equalise  the  vari- 
ous debits  and  credits.  The  same  institution  also  serves  to 
facilitate  the  cashing  of  bills  and  cheques,  which  are  immediately 
credited  to  the  respective  accounts.  In  the  year  191 1  the  total 
business  done  reached  nearly  791,000,000  francs. 

Chapter  VII.     Co-operative  Agricultural  Credit  in  France. 

The  first  experiments  in  agricultural  credit  in  France  date 
back  to  the  middle  of  the  past  century,  but  its  real  development 
only  begins  after  the  promulgation  in  1884  of  the  Law  on  Pro- 
fessional Syndicates. 

In  1894  the  law  which  instituted  local  agricultural  mutual 
credit  banks  gave  a  powerful  impetus  to  agricultural  credit,  and 
in  1899  the  Law  on  Regional  Banks,  which  authorised  the  giving 
of  state-aid,  consolidated  agricultural  credit  in  France  into  an 
organic  system  which  to-day  spreads  over  the  whole  country. 

The  characteristics  of  this  system  are  the  following:  decentral- 
isation, mutuality,  organisation  according  to  occupation,  and 
state-aid.  Its  objects  consist,  in  the  first  place,  in  supplying  farm- 
ers with  the  means  necessary  for  carrying  on  the  ordinary  agri- 
cultural operations  by  means  of  loans  for  short  periods ;  in  the 
second  place  in  facilitating  co-operative  societies  and  individual 
farmers  in  carrying  on  operations  extending  over  long  periods. 

Besides  the  co-operative  credit  encouraged  by  the  state  there 
exist  also  various  minor  groups  of  co-operative  institutions 
which  have  wished  to  remain  entirely  independent  and  which 
rely  solely  on  their  own  resources. 

I.  State-aided  Co-operative  Credit 
The  fundamental  laws  which  regulate  the  state-aided  system 


AGRICULTURAL   CREDIT  25 

of  agricultural  co-operative  credit  are  those  of  November  5th, 
1894  and  of  March  31st,  1899. 

The  former  instituted  the  local  mutual  agricultural  credit 
bank ;  the  latter  the  regional  bank,  which  groups  together  the 
local  banks  of  a  given  district,  either  the  region,  the  depart- 
ment or  a  special  area  determined  by  its  agricultural  char- 
acteristics. 

The  state  has  placed  at  the  disposal  of  the  regional  banks,  in 
order  that  they  may  in  their  turn  finance  the  local  banks,  con- 
siderable sums,  which  the  bank  of  France  is  bound  to  pay  to  them 
as  a  condition  of  the  renewal  of  its  privileges.  The  Law  of 
November  17th,  1897,  in  fact,  laid  it  down  that  the  Bank  of 
France  must  advance  to  the  state,  without  interest,  for  the 
whole  period  of  its  concession  (that  is,  to  the  end  of  1920)  a 
loan  of  40,000,000  francs,  and  that  it  must  also  make  an  annual 
payment  (calculated  according  to  the  business  done)  which  must 
not  be  less  than  2,000,000  francs  and  is,  in  fact,  between  3,000,000 
and  5,000,000  francs.  These  sums  form  the  state-fund  out  of 
which   the  agricultural  credit  system  is  aided. 

(a)       THE   LOCAL   BANKS 

The  local  banks  may  be  composed  either  of  the  whole  or  of  a 
part  of  the  members  of  one  or  more  agricultural  syndicates,  or 
of  the  members  of  one  or  more  mutual  agricultural  insurance 
societies.  The  object  of  this  provision  is  to  strengthen  their 
characteristic  of  mutuality  and  solidarity  and  to  facilitate  mutual 
acquaintance  and  confidence  amongst  the  persons  composing 
the  credit  society. 

The  objects  of  a  local  credit  society  are  to  facilitate  or  to 
guarantee  the  operations  either  of  the  societies  mentioned  or  of 
the  members. 

The  local  banks  have  a  restricted  area  of  operations,  limited 
to  the  commune,  the  canton,  or  the  village.  The  formalities  of 
registration  are  reduced  to  a  minimum  and  they  are  exempted 
from  certain  taxes. 

Their  initial  capital  is  formed  by  shares  ("quotes-parts"), 
subscribed  exclusively  by  the  members ;  it  is  sufficient  if  one- 
fourth  is  paid  up.  The  shares,  which  are  generally  of  the  value 
of  20  or  40  francs  each,  do  not  give  any  right  to  divi- 
dend, but  bear  a  fixed  rate  of  interest  which  must  not  exceed 


26  SELECTED   ARTICLES 

4  per  cent.  The  societies  can  receive  deposits  with  or  without 
interest. 

As  to  the  HahiHty  of  the  members,  the  law  allows  the  utmost 
latitude  to  the  societies  to  decide  its  character  and  extent  by 
their  rules  according  to  local  conditions.  In  the  majority  of 
cases,  the  societies  have  decided  that  their  members  shall  be 
liable  up  to  the  amount  of  the  shares  subscribed.  Some  have 
fixed  upon  a  wider  liability,  either  unlimited  liability  of  all 
the  members  such  as  is  found  in  the  Raiffeisen  banks,  or  un- 
limited liability  of  a  certain  number  of  members  (for  example, 
the  members  of  the  Committee  of  Management),  or  a  liabihty 
extending  to  two,  three  or  four  times  the  nominal  value  of  the 
shares  of  each  member.  Amongst  the  promoters  of  these 
societies,  however,  there  is  now  manifest  a  tendency  to  adopt 
unlimited  liability  as  the  best  safeguard  for  healthy  co-operation. 

The  society  is  managed  by  a  council  and  by  a  committee, 
which  generally  comprises  a  president,  a  vice-president  and  a 
secretary.  As  soon  as  it  is  established  it  becomes  affiliated  to 
the  regional  bank  of  the  department.  To  do  this  it  must  sub- 
scribe for  a  certain  number  of  shares  in  the  regional  bank.  It 
is  then  admitted  to  partake  in  the  credit  facilities  afforded  by 
the  regional  bank,  which  discounts  its  bills  or  grants  loans  to  it 
to   form  its  working  capital. 

In  the  first  case,  when  a  member  applies  for  a  loan  from  the 
local  bank,  it  requires  him  to  sign  a  bill;  this  is  then  sent  to  be 
discounted  to  the  regional  bank,  which  immediately  forwards  the 
amount  applied  for,  less  the  discount.  In  the  second  case,  the 
regional  bank  grants  to  the  local  bank  a  loan  which  is  usually 
proportionate  to  the  amount  of  the  shares  subscribed.  The 
local  bank,  when  it  does  not  immediately  require  the  money  so 
obtained,  deposits  it  with  the  Savings  Bank  and  withdraws 
from  time  to  time  such  sums  as  may  be  necessary. 

The  first  system,  which  is  simpler  and  allows  of  a  greater 
measure  of  control  by  the  regional  bank  over  the  affiliated  so- 
cieties, is  adopted  in  the  great  majority  of  cases.  Thus,  for 
example,  in  1910  the  regional  banks  discounted  bills  to  the 
amount  of  81,278,670  francs  and  only  granted  loans  of  1,445,431 
francs. 

The  rate  of  interest  on  the  loans  must  naturally  be  higher  than 
the  discount  required  by  the  regional  banks.     The  latter  being 


AGRICULTURAL   CREDIT  27 

three  per  cent,  the  Interest  demanded  by  the  local  banks  does 
not  usually  exceed  four  per  cent.  The  margin  of  one  per  cent 
serves  for  the  payment  of  the  expenses  of  management  and 
for  the  formation  of  the  reserve  fund. 

As  to  the  size  of  the  loans,  in  some  societies  the  sums  which 
may  be  advanced  to  members  are  proportionate  to  the  shares 
which  they  have  subscribed,  and  may  be  10,  15  or  20  times  their 
amount.  In  other  societies  it  is  laid  down  that  the  loan  shall 
not  exceed  a  fixed  sum,  1,000  or  2,000  frs.,  according  to  the  kind 
of  cultivation  prevailing  and  to  the  solvency  of  the  applicant. 

There  are  different  kinds  of  guarantee,  varying  according  to 
circumstances.  Certain  banks  insist  in  every  case  upon  a  surety 
or  a  "warrant"  or  upon  the  deposits  of  securities.  Others  only 
require  such  guarantees  when  the  loan  is  of  a  certain  amount. 
If  the  object  of  the  loan  is  the  purchase  of  live-stock,  the  ani- 
mals must  always  be  insured. 

The  period  of  the  loans  varies,  according  to  the  nature  of 
the  operations  to  be  undertaken,  from  three  months  to  a  year. 
The  period  of  the  bills  varies  according  to  the  period  of  the  loan 
and  according  to  the  system  adopted  by  the  regional  bank  to 
which  the  local  bank  is  affiliated.  Many  regional  banks  only 
allow  bills  of  three  months,  with  two,  three  or  four  renewals ; 
others  allow  bills  for  a  period  equal  to  that  of  the  loan.  In  the 
case  of  renewals  an  instalment  is  almost  always  required. 

At  least  three-fourths  of  the  profits  of  the  society,  are  al- 
located to  the  formation  of  a  reserve  fund,  until  that  fund  is 
equal  to  half  the  paid-up  share  capital.  The  balance,  if  the  Gen- 
eral Meeting  so  decide,  may  be  divided  amongst  the  individual 
members  in  proportion  to  their  dealings  with  the  society. 

When  a  society  is  dissolved,  the  reserve  fund  and  other  assets 
are  divided  amongst  the  members  in  proportion  to  their  shares 
unless  (as  is  generally  the  case)  the  rules  have  provided  for  their 
application  to  some  work  beneficial  to  agriculture. 

The  local  banks  have  spread  rapidly  since  1900,  as  the  follow- 
ing figures  indicate : 

Number  Membership 

of  of 

Year.                                                                        local  banks.  local  banks. 

1901 309  7,998 

1905 1,335  61.874 

1910 3,338  151,621 

1911 3,946  185,552 


28 


SELECTED   ARTICLES 


The  following  figures  give  an  idea  of  the  business  done  by 
the  local  banks  in  recent  years : 

lltlO  1911  Increase. 

Number  of  local  banks 3,338  3,94G  608 

Membership 151,621  185,552  41,801 

Francs.  Francs.  Francs. 

Subscribed    capital    14,210,598  18,158,458  3,947,860 

Paid-up   capital    9,916,611  11,784,017  1,867,406 

New    loans    granted    during 

the     year     (exclusive     of 

renewals)     70,533,340  82,540,623^       12,007,283 

Loans     outstanding    at    the 

end  of  the  previous  year..    42,671,323  51,983,588  9,312,265 

Totals     113,204,663         134,524,211         21,319,548 

Repayments    received    61,388,806  72,924,328         11,703,253 

Loans    outstanding    on    De- 
cember  31st    51,815,857  61,599,8832  9,616,295 

The  official  reports  do  not  indicate  the  capital  of  the  local 
banks  separately,  nor  the  business  done  by  them,  but  limit  them- 
selves to  giving  such  particulars  for  the  groups  of  local  societies 
affiliated  to  each  central  bank.  From  these  data,  however,  it  is 
evident  that  the  capital  of  the  local  banks  is  not  very  large,  and 
the  same  may  be  said  of  their  reserve  funds.  The  statistics 
give  no  information  regarding  the  deposits,  but  it  may  be  as- 
sumed that  they,  too,  are  not  very  large  in  amount. 

The  interest  paid  on  the  shares  varies  from  2  to  5  per  cent ; 
the  rate  of  discount  from  3  to  5  per  cent. 

(b)       THE    REGIONAL   BANKS 

The  agricultural  credit  banks  of  the  second  degree,  called 
regional  banks,  are  regulated  by  the  Law  of  Alarch  31st,  1899. 
They  receive  from  the  state,  out  of  the  funds  furnished  by  the 
Bank  of  France,  loans  without  interest,  up  to  the  amount  of 
four  times  their  paid-up  capital,  for  a  period  of  five  years,  sub- 
ject to  renewal.  If,  for  example,  there  are  in  a  department  10 
local  banks  which  have  each  subscribed  10,000  francs,  their  shares 
form  an  initial  capital  of  100,000  francs  for  the  regional  bank; 
the  Government  will  then  make  an  advance  of  400,000  francs. 

A  Special  Committee  nominated  by  the  Minister  of  Agricul- 
ture distributes  such  sums  amongst  the  regional  banks,  and  a 
body  of  inspectors  supervises  their  working. 

■■■$15,926,796,   or    £3,272,642. 
-  $11,886,133,  or   £2,442,366. 


AGRICULTURAL   CREDIT  29 

The  regional  banks  are  based  upon  the  same  principles  as 
the  local  banks  and  they  enjoy  the  same  privileges.  They  are 
composed  of  local  banks  and  of  individual  farmers,  but  two- 
thirds  of  the  shares  are  reserved  by  preference  to  the  former. 
The  local  banks  usually  pay  up  their  shares  in  full ;  the  indi- 
vidual members  as  a  rule  only  pay  one- fourth.  Each  member 
is  liable  up  to  the  amount  of  the  shares  subscribed.  The  Com- 
mittee of  Management  of  a  regional  bank  is  elected  from  the 
representatives  of  the  local  banks. 

The  law  limits  the  interest  on  the  shares  to  a  maximum  of  5 
per  cent,  and  fixes  the  maximum  of  the  deposits  which  the  re- 
gional banks  can  receive  and  the  bonds  which  they  may  issue 
at  three-fourths  of  the  amount  of  the  securities  which  they  hold. 

The  regional  banks  can,  moreover,  have  their  bills  re-dis- 
counted by  the  Bank  of  France,  or  other  credit  institutions. 

The  profits  are  carried  to  the  reserve  fund  which  serves,  in 
due  course,  to  repay  the  state  loans. 

To  the  primary  object  of  the  regional  banks  have  in  recent 
years  been  added  others,  namely,  the  making  of  loans  to  co-opera- 
tive societies  for  the  production  and  sale  of  agricultural  produce, 
and  of  loans  to  individual  farmers  for  the  acquisition  and  im- 
provement of  small  holdings.  For  these  purposes  special  ad- 
vances are  made  by  the  state  to  the  regional  banks  out  of  the 
fund  provided  by  the  Bank  of  France. 

Without  taking  into  account  the  renewals,  the  following  figures 
show  the  loans  made  by  the  regional  banks,  etc.,  in  191 1,  as 
compared  with  1910: 

1910.  1911.  Increase. 

Francs.  Francs.  Francs. 

Direct  loans  for  working  capital         1,251,220  1,445,43P  194,211 
Loans   in   the   form   of   discounts 

of   new    bills 66,957,353  81,279,670=  14,321,317 

Loans  outstanding  at  the  end  of 

the    previous    year 40,971,508  49,487,477  8,515,969 

Totals     109,180,081     132,211,578      23,031,497 

Repayments   received  during  the 

year     59,887,572       72,379,905      12,687,301 

Loans  outstanding  at  the  end  of 

the   year    49,292,509      59,S31,673''     10,344,196 

If  to  the  loans  for  short  periods  are  added  those  for  long  pe- 

1  $278,006,  or    £57,310. 

=  $15,683,294,  or  £3,222,607. 

^  $11,544,944,  or    £2,372,258. 


30  SELECTED   ARTICLES 

riods  advanced  to  co-operative  societies  and  individual  farmers, 
v^'e  have  the  following  figures : 

Francs. 

Loans  for   short   periods 132,211,578 

to  co-operative  societies   (78  societies) 2,364,280 

for  long:  periods  to  individuals   (981  loans) 3,644,702 

138,220,5501 

To  the  end  of  1911,  202  co-operative  societies  had   received 

6,642,277  francs,  in  loans  at  rates  of  interest  varying  from  i  to  2 

per  cent. 

A   system    for  the   provision   of    long-period   loans    to   small 

farmers  came  into  operation  in  1910.    In  two  years  1, 155  farmers 

had  obtained  loans  to  the  amount  of  4,596,692  francs. 

(c)       GENERAL     RESULTS 

The  general  results  achieved  in  the  first  decade  in  which  the 
system  of  state-aided  agricultural  credit  has  been  in  force  are 
most  satisfactory.  The  local  banks  are  constantly  increasing 
and  respond  ever  better  to  the  new  needs  of  agriculture.  In 
the  period  from  1900  to  1 911  they  have  placed  about  467,000,000 
francs  at  the  disposal  of  farmers ;  the  2,000,000  francs  advanced 
in  1900  have  risen  to  82,500,000  francs  in  191 1. 

It  is  noted,  however,  that  many  regional  banks,  trusting  too 
much  to  state  aid,  are  not  sufficiently  careful  to  make  the  quin- 
quennial repayments  of  the  loans  advanced  by  the  state,  and 
neglect  to  form  resources  of  their  own,  other  than  the  sums 
carried  automatically  to  the  reserve,  by  making  efforts  to  attract 
deposits.  The  remark  also  applies  to  some  of  the  local  banks. 
In  view  of  this,  closer  government  supervision  is  recommended 
and  meanwhile  the  Ministry  of  Agriculture  has  reorganised  and 
strengthened  the  service  of  inspection. 

Craftsman.  24:334-5.  June,  1913. 

Financial  Help  for  American  Farmers ;  Cooperative  Farm 
Credits.    W.   H.  Jenkins. 

During  last  winter  I  heard  at  agricultural  conventions  several 
addresses  on  financing  farmers  by  a  cooperative  credit  system 
under  state  or  government  control.  Some  of  the  talks  were 
given  by  men  who  had  investigated  systems  now  in  operation  in 

1  $26,670,632,  or    £5,480,289. 


AGRICULTURAL   CREDIT  31 

Europe.  After  the  convention  I  also  had  the  opportunity  of 
hearing  the  opinions  of  farmers  as  they  debated  the  advisabihty 
of  such  means  of  capitalizing  farming  operations. 

The  conclusions  I  have  drawn  indicate  that  most  farmers 
are  very  conservative  about  obtaining  loans  by  mortgaging  their 
lands.  The  man  who  owns  a  farm  free  from  debt  hesitates  a 
long  time  before  placing  on  it  a  mortgage  to  enable  him  to  buy 
pure-bred  stock,  drain  land  or  secure  needed  machinery,  even 
though  he  believes  the  money  will  be  well  invested.  Especially 
will  he  consider  the  question  before  placing  a  long-time  loan  on 
his  real  estate,  in  order  to  secure  a  low  rate  of  interest.  And  a 
man  can  hardly  be  blamed  for  not  wanting  to  incur  a  debt  that 
he  will  not  be  allowed  to  pay  for  many  years,  according  to  the 
terms  of  his  loan.  For  short-time  loans  there  is  slight  prospect 
that  money  can  be  borrowed  more  cheaply  than  at  the  legal  rate 
of  interest. 

Some  farmers  doubt  their  ability  to  use  borrowed  capital  so 
that  they  will  feel  safe  in  its  investment.  It  requires  scientifically 
educated  and  trained  business  men  to  get  the  greatest  benefit 
from  a  herd  of  pure-bred  cows,  or  to  build  up  the  soil  and  make 
it  feed  the  cows  well,  with  little  purchased  fodder.  Many  men 
lack  the  confidence  to  borrow  $1,000  or  so  to  start  a  herd  of 
pure-bred  cattle,  or  to  provide  for  some  needed  farm  equipment. 
Thus  it  is  certain  that  a  farm  credit  system  cannot  be  forced ; 
it  must  await  the  time  when  the  men  needing  it  have  learned 
how  to  use  it  confidently  and  safely. 

There  is  no  question  that  the  scientific  agriculturist  should 
be  able  to  use  more  capital  on  his  farm  profitably,  and  that  the 
success  of  many  farmers  and  the  prosperity  of  the  whole  coun- 
try is  hindered  by  the  lack  of  it.  This  condition  must  be  im- 
proved by  the  work  of  agricultural  schools  and  colleges,  farm 
bureaus,  etc.  One  of  the  best  things  a  nation  can  do  is  to  place 
capital  in  the  hands  of  properly  educated,  vigorous  and  well- 
balanced  young  men  who  wish  to  work  out  their  life  problems 
on  farms.  Capital  is  a  most  necessary  tool  and  with  it  can  be 
developed  great  natural  resources  of  benefit  to  the  farmer  and 
to  all  mankind.  The  farmer  who  prepares  himself  to  use  capital 
judiciously  can  help  to  bring  out  the  nation's  agricultural  wealth. 
It  is  therefore  a  judicious  policy  for  the  state  to  provide  the 
means  of  making  capital  available. 


32  SELECTED   ARTICLES 

The  principle  of  cooperative  credit  is  that  of  the  brotherhood 
of  mankind.  It  is  an  ideal  toward  which  all  should  work.  When 
one  man  has  a  surplus  of  capital  the  best  thing  to  do  with  it  is 
to  lend  it  to  someone  who  is  in  need  of  it  and  who  can  make 
good  use  of  it.  Just  how  farmers  can  loan  money  to  each  other 
through  cooperative  associations  or  farmers'  banks  is  a  problem 
yet  unsolved  in  this  country.  A  banking  system  could  be  based 
as  well  on  farm  mortgage  bonds  and  the  issue  of  currency  so 
secured  as  on  government  bonds.  Some  think  that  the  national 
debt  should  gradually  be  paid  and  land  bonds  take  its  place  in 
the  banking  system.  Such  bonds  are  negotiable  in  Europe,  and 
are  considered  as  good  an  investment  as  government  bonds. 
These  land  bonds,  running  20  years  or  more,  are  placed  by  the 
farm  banks  at  314  per  cent  and  the  money  is  loaned  to  farmers  at 
4  or  4J/2  per  cent,  the  banks  getting  the  margin  for  floating  the 
bonds.  Farmers  can  mortgage  their  land  for  only  one-half  its 
value,  while  the  whole  system  is  under  government  supervision. 
No  farmer  can  borrow  money  in  this  way  unless  he  is  able  to 
show  how  he  can  profitably  invest  it  in  his  farming  business. 
The  use  he  shall  make  of  the  money  on  his  farm  is  specified  in 
some  of  the  loans.  As  the  money  goes  to  improve  the  land  and 
appreciate  its  value,  there  can  be  no  safer  investment. 

One  institution  that  can  help  American  farmers  to  use  a 
government-controlled  farm  system  is  the  Farm  Bureau,  an  as- 
sociation of  farmers  in  which  the  United  States  Department  of 
Agriculture  and  the  State  agricultural  institutions  cooperate 
with  county  ofiicials  in  sending  trained  agricultural  teachers  to 
do  actual  demonstration  work  on  county  farms.  The  farmers' 
institutes  have  taught  principles.  The  agricultural  teacher  in  the 
farm-bureau  work  goes  to  farms  and  demonstrates  how  to  apply 
principles  of  agricultural  science  to  actual  conditions,  helping 
thus  to  solve  individual  problems.  It  is  probable  that  farmers 
educated  by  the  Farm  Bureau  and  working  under  the  direction 
of  its  manager,  a  graduate  of  an  agricultural  college  and  able 
to  demonstrate  the  science  he  has  learned,  can  use  capital  well. 
It  may  not  be  generally  known  that  the  Farm  Bureau  has  passed 
the  experimental  stage  and  is  now  in  successful  operation  in 
Jefferson  County,  New  York.  The  point  is  that  when  the  farmers 
in  Jefferson  County  have  learned  more  of  the  science  of  agri- 
culture and  are  more  competent  to  practice  it;  and  when  they 


AGRICULTURAL   CREDIT  33 

shed  erroneous  beliefs  about  farming  and  using  loans  under  the 
direction  of  their  expert  farm-bureau  manager,  it  will  be  a  safe 
and  profitable  thing  to  obtain  short-time  loans  at  a  just  rate  of 
interest. 

Some  New  York  farmers  with  whom  I  have  talked,  men  of 
business  sagacity  and  good  judgment,  foresee  a  danger  in  allow- 
ing American  farmers  to  obtain  long-time  mortgage  loans.  The 
incompetent  farmer,  they  argue,  will  not  pay  the  mortgage  and 
will  therefore  cease  to  be  a  landowner.  Surely  it  is  not  en- 
couraging to  think  that  a  hustling  American  farmer  would  not  be 
able  to  own  a  farming  plant  free  from  debt  in  20  or  30  years, 
the  time  in  which  the  land  bonds  with  the  lowest  rates  of  inter- 
est mature.  Some  farmers,  however,  can  readily  understand 
now  a  young  man,  who  has  or  is  able  to  earn  about  one-half 
of  the  value  of  the  farm  he  wishes  to  buy,  will  be  enabled  to  se- 
cure the  farm  on  the  easiest  terms  by  placing  on  it  a  land-bond 
mortgage  that  matures  in  20  years.  But  even  then  the  benefit 
is  somewhat  doubtful,  as  it  is  possible  to  buy  a  farm  with  half 
the  purchase  money  and  give  a  mortgage  for  the  balance  at  the 
5  per  cent,  interest  rate. 

Whatever  system  for  financing  farmers  is  devised  through 
state  aid,  there  should  always  be  provision  made  for  the  payment 
of  land  bonds  by  landowners ;  money  should  not  be  loaned  to  a 
man  unless  he  can  demonstrate  his  ability  to  pay  it,  for  the 
object  is  to  work  toward  the  ownership  of  land  by  the  farmer 
who  lives  on  it  and  not  toward  tenantry. 

Some  plan  of  financing  farmers  through  state  or  government 
supervision  is  so  nearly  in  sight  that  we  feel  it  is  assured  for  the 
near  future.  Governors  have  appointed  representatives  to  go  to 
Europe  to  investigate  systems  in  use  there  and  direct  informa- 
tion from  the  Legislature  at  Albany  indicates  that  the  members 
are  favorable  to  the  passage  of  a  bill  on  farm  credits  as  soon 
as  it  is  rightly  formulated. 

I  will  quote  briefly  from  the  report  of  J.  J.  Dillion,  publisher 
of  the  Rural  Nezv  Yorker,  read  at  the  meeting  of  the  New  York 
State  Agricultural  Society  at  Albany.  He  stated  that  he  "had 
studied  the  subject  abroad  and  had  found  no  principles  that 
are  not  in  operation  here.  Europeans,"  he  said,  "were  only 
using  the  principle  of  partnership  applied  to  farm  mortgages."  In 
this  simple  business  proposition  there   is   nothing  mystic.     Co- 


34  SELECTED   ARTICLES 

operation  of  the  members  of  an  organization  must  create  a  fund 
by  contributions,  which  fund  is  loaned  to  farmers  at  low  rates 
of  interest.  The  result  is  the  creation  of  land  banks  that  loan 
money  on  farm  mortgages.  The  money  is  loaned  for  from  lo  to 
75  years,  the  lowest  rate  of  interest  being  on  the  long-time  loans. 
The  strict  society  plan  of  loaning  is  more  economical  to  the 
farmer  than  is  the  bank  system,  because  it  is  cooperative  and 
the  lender  can  get  only  a  fixed  rate  of  interest,  one  determined 
by  the  organization.  In  Europe  the  debentures  or  farm  securities 
sell  as  readily  as  government  bonds.  The  term  of  the  mortgage 
provides  for  its  gradual  payment,  the  plan  being  that  the  farmers 
shall  eventually  own  their  farms. 

In  our  country  we  need  no  government  subsidy,  only  a  sys- 
tem by  which  the  farmers  can  cooperatively  use  their  own  funds 
for  mutual  benefits.  Cooperative  savings  banks  are  needed  that 
will  make  the  best  possible  use  of  the  savings  of  our  people  and 
assist  them  in  the  upbuilding  and  advancement  of  agriculture. 


American   Economic   Review.   2:852-72.   December,    1912. 

Agricultural  Credit  in  the  United  States.    E.  W.  Kemmerer. 

The  United  States,  although  the  leading  country  of  the  world 
in  the  amount  of  its  agricultural  products  and  in  the  extent  of 
its  banking  business,  is  behind  nearly  every  other  progressive 
M  country  of  importance  in  the  development  of  agricultural  credit, 
l\  i.  e.,  short-time  non-mortgage  credit.  Our  manufacturing  and 
commercial  businesses  are  financed  largely  by  means  of  such 
credit,  and  the  capital  invested  in  these  industries  is  thereby 
rendered  manifoldly  efificient ;  not  so  with  agriculture.  Most 
farmers  apparently  make  little  or  no  use  of  short-time  credit. 
There  seems  to  be  a  wide  acceptance  in  this  country  even  among 
the  farmers  themselves  of  the  dictum  of  Louis  XIV,  that :  "Credit 
supports  agriculture,  as  the  cord  -supports  the  hanged."  Is  this 
a  correct  description  of  the  situation?  If  so,  what  is  the  ex- 
planation, and  what  remedies  if  any  are  needed?  The  object 
of  this  paper  is  to  throw  light  upon  the  answers  to  these 
questions. 

First,  as  to  existing  banking  facilities  for  agricultural  credit, 
and  their  utilization  by  farmers.    It  is  well  known  that  the  bank- 


AGRICULTURAL   CREDIT  35 

ing  capital  of  the  country  is  concentrated  to  a  great  extent  in 
our  large  cities — to  a  greater  extent  than  it  would  be  if  we  had  a 
well-developed  system  of  branch  banks  like  Canada — and  that 
the  banks  of  these  cities  are  prevented  by  reason  of  their  location 
from  making  many  agricultural  loans,  even  if  they  were  so  in- 
clined. Of  the  7,301  national  banks  in  the  United  States  Septem- 
ber I,  191 1,  192  or  2.6  per  cent  were  located  in  the  dozen  largest 
cities  of  the  country.  The  national  banks  of  these  twelve  cities, 
representing  but  14  per  cent  of  the  population  of  the  country, 
had  27  P^J"  cent  of  the  national  banking  capital  (capital,  surplus, 
and  undivided  profits),  t,2i  per  cent  of  the  individual  deposits, 
and  40  per  cent  of  the  loans.  It  should  be  noted,  however,  that 
since  the  act  of  1900,  authorizing  the  establishment  of  national 
banks  with  a  capital  of  less  than  $50,000  in  small  towns,  there  has 
been  a  continual  and  rapid  increase  in  the  number  of  national 
banks  in  small  communities.  On  September  i,  191 1,  out  of  the 
total  7,301  national  banks  there  were  1,966  with  a  capital  of 
$25,000,  and  therefore  presumably  located  in  towns  of  less  than 
3,000  population,  372  with  a  capital  between  $25,000  and  $50,000, 
and  therefore  presumably  in  towns  of  less  than  6,000  population, 
and  2,297  with  a  capital  between  $50,000  and  $100,000.  Except 
for  banks  in  towns  not  exceeding  6,000  population,  the  law  as 
amended  in  1900  does  not  permit  any  national  bank  to  be  organ- 
ized with  a  capital  less  than  $100,000. 

Are  the  national  banks  which  are  accessible  to  farmers  in  a 
position  under  the  law  to  meet  farmers'  needs?  The  answer  to 
this  question  must  be  in  the  affirmative.  Aside  from  the  fact  that 
national  banks  are  not  permitted  to  make  loans  on  real  estate 
security,  there  is  no  restriction  in  the  national  banking  act  which 
would  interfere  with  loans  to  farmers  for  agricultural  purposes. 
Personal  security  alone  is  legally  acceptable;  the  range  of  pos- 
sible collateral  security  is  practically  unlimited ;  and  there  is 
no  limitation  fixed  by  law  as  to  the  period  of  loans.  National 
banks  therefore  have  a  very  free  hand  in  regard  to  loans  to 
farmers. 

When  we  inquire  concerning  agricultural  credit  in  banks 
under  state  charters  we  find  conditions  varying  with  the  differ- 
ent states,  but,  with  a  few  minor  qualifications,  it  may  be  said 
that  the  state  banking  laws  are  free  from  restrictions  that  would 
hamper   state   banks    and  trust   companies   in   extending   credit 


36  SELECTED   ARTICLES 

liberally  to  responsible  farmers.  They  are  in  a  much  better  posi- 
tion in  one  respect  to  deal  with  farmers  than  are  national  banks, 
that  is,  in  the  matter  of  accepting  real  estate  security.  No  state 
denies  state  banks  this  privilege,  and  such  restrictions  as  exist 
upon  its  exercise  are  generally  not  onerous. 

If  commercial  banks  are  comparatively  unhampered  by  law  in 
making  short-time  loans  to  farmers,  it  may  be  asked:  To  what 
extent  are  such  loans  made?  Unfortunately  practically  no  infor- 
mation is  available  on  this  question.  In  answer  to  an  inquiry  the 
Comptroller  of  the  Currency  wrote,  under  date  of  May  27  of  this 
year,  that  no  information  with  reference  to  short-time  loans  made 
to  farmers  by  national  banks  had  ever  been  compiled  by  the 
comptroller's  office.  The  writer  has  found  no  trace  of  any  in- 
vestigation of  this  subject  by  state  banking  departments.  For 
about  a  year  he  has  taken  occasion  to  inquire  at  every  oppor- 
tunity of  individual  bankers  concerning  their  experience  with 
regard  to  loans  to  farmers  in  different  parts  of  the  country. 
The  replies  received  are  so  divergent  that  no  conclusion  can  be 
drawn  from  them,  except  that  the  practice  varies  widely  in 
different  sections  of  the  country  and  even  in  different  communi- 
ties in  the  same  section,  and  that  probably  the  farmers  of  the 
North  Central  and  Western  states  borrow  of  commercial  banks 
more  than  do  those  of  the  Eastern  and  Southern  states.  There 
is  not  sufficient  evidence,  however,  for  this  latter  inference  to 
make  it  much  more  than  a  guess.  In  the  absence  of  any  com- 
prehensive data,  I  shall  resort  to  the  unsatisfactory  but  repre- 
sentative replies  from  different  parts  of  the  countr>^ 

Neither  of  the  two  national  banks  in  the  city  of  Ithaca,  N.  Y 
makes  any  appreciable  amount  of  loans  to  farmers.  Both  claim 
to  be  willing  to  do  so,  but  say  there  is  practically  no  demand.  In 
some  of  the  neighboring  cities,  however,  such  loans  by  national 
banks  are  more  common.  The  cashier  of  a  national  bank  in  a 
town  of  about  Soo  population  in  an  agricultural  section  of  north- 
eastern Pennsylvania  writes : 

Our  farmers  as  a  rule  are  not  large  borrowers  and  want  loans  only  in 
small  amounts  for  short  periods. 

Farmers  in  general  will  not  go  on  each  other's  paper  no  matter  how 
good  the  parties  are,  for  they  have  been  so  often  taken  in  by  wild-cat 
schemes  that  they  are  shy  when  their  names  are  required  to  be  placed  upon 
paper.  They  realize  also  that  they  are  not  familiar  with  business  methods 
in  the  commercial  world  and  dare  not  trust  themselves. 


AGRICULTURAL   CREDIT  37 

There  is  a  moderate  amount  of  borrowing  by  farmers  in  west- 
ern New  Jersey.  Estimates  made  by  bankers  in  Princeton  as  to 
the  proportion  of  farmers  in  that  neighborhood  who  borrow 
for  short  periods  of  local  banks  vary  from  15  to  40  per  cent. 
A  former  president  of  a  national  bank  in  IndianapoHs  writes : 
We  came  very  little  in  contact  with  farmers.  We  made  special  effort 
to  secure  such  business  by  sending  to  a  considerable  mailing  list  of  care- 
fully selected  farmers  circulars  and  personal  letters  .  .  .  but  the  busi- 
ness did  not  come.  My  inference  was  that  they  dealt  with  the  nearby 
small  banks. 

Of  the  situation  in  Lafayette,  Indiana,  a  former  vice-presi- 
dent of  a  national  bank,  writes : 

About  so  per  cent  of  our  business  was  with  farmers.  They  borrow 
frequently  from  commercial  banks,  funds  to  be  used  for  crop  planting,  crop 
gathering-,  purchase  of  agricultural  machinery,  improvements  on  the  farm, 
purchase  of  cattle,  and  the  carrying  of  cattle  or  hogs  to  maturity.  Through 
Indiana  these  farmers'  loans  are  very  usual  in  the  country  banks,  many 
preferring  state  charters  so  they  may  make  these  loans  not  only  on  personal 
but  also  on  mortgage  security. 

Farmers  are  seldom  able  to  give  any  but  personal  or  mortgage  security. 
A  large  percentage  of  them  are  sufficiently  responsible  to  be  entitled  to 
and  to  receive  reasonable  credit  without  security. 

Farmers  seem  to  endorse  for  each  other  much  more  readily  than  do 
those  of  other  classes.  .  .  .  The  reason  is,  I  think,  clear.  Each  knows 
pretty  much  everything  about  his  neighbor's  financial  status,  the  amount 
and  value  of  his  land,  his  live-stock,  and  other  visible  personal  property, 
the  amount  of  any  mortgage  and  when  due.  So  much  being  thus  in  the 
open  there  is  less  of  the  secretive  habit,  so  that  the  extent  of  the  invisible 
personal  property  and  debts  is  apt  to  be  known. 

A  similar  report  comes  from  a  national  bank  in  Lincoln, 
Nebraska,  from  which  the  following  extracts  are  taken : 

The  farmers  of  this  state  have  need  of  accommodations  of  this  kind 
to  carry  them  through  the  crop  season.  As  a  matter  of  fact,  they  use  short- 
time  credit  to  fully  as  great  an  extent  as  do  the  business  men  in  the  city 
and  smaller  towns.  In  fact,  I  think  it  is  true  that  in  the  smaller  towns 
the  bankers  favor  the  farmers  in  preference  to  the  small  business  men.  .  .  . 

There  is  no  doubt  about  the  average  well-to-do  farmer  in  this  state 
being  able  to  furnish  satisfactory  security  aside  from  mortgaging  his  farm 
for  such  temporary  loans  within  any  reasonable  limitations.  In  some  cases 
the  banks  take  chattel  mortgages  on  cattle  or  other  live-stock,  and  in  some 
cases  where  the  farmer  has  a  good  equity  in  his  farm  they  will  not  hesi- 
tate to  take  his  personal  note. 

While  I  do  not  know  that  there  is  any  particular  difference  between 
farmers  and  other  classes  in  this  state  as  to  their  willingness  to  go  security 
for   each   other,    yet   very   little    of   this    is    done   any   more.     There   was   a 


38  SELECTED   ARTICLES 

time  when  it  was  not  an  uncommon  thing,  but  it  has  become  less  and  less 
until  now  there  is  very  little  signing  done  for  others.  In  fact,  the  farmers 
feel  that  they  are  able  to  take  care  of  themselves  and  do  not  ask  others  to 
sign  with  them,  and  are  able,  to  handle  themselves  without  such  an  en- 
dorsement.    This  is  true  of  all  classes  in  this  state. 

I  have  never  felt  that  in  this  locality  farmers  suffered  in  any  way 
from  lack  of  credit  facilities.     ... 

A  former  bank  examiner  in  the  state  of  California,  himself  a 
farmer,  writes : 

The  farmers  of  California  do  not  to  any  considerable  extent  make  a 
practice  of  borrowing  money  from  local  banks  or  money  lenders  for  short 
periods. 

In  reviewing  the  various  bank  examiner's  reports  on  some  500  state 
banks  I  recall  very  few  instances  of  crop  mortgages,  and  it  impresses  me 
that  in  many  of  the  cases  the  mortgage  was  taken  to  obtain  additional 
security  for  loans  previously  granted  and  secured  otherwise. 

I  think  it  would  be  safe  to  say  that  the  bankers  as  a  rule  have  not 
favored  short-time  unsecured  loans  to  farmers.  They  are,  however,  fast 
awakening  to  the  fact  that  as  a  rule  these  are  the  safest  loans  a  bank  can 
make,  and  are  making  an  effort  to  get  in  closer  touch  with  the  farmer.  It 
would  also  be  safe  to  say  that  the  average  small  farmer  does  not  as  yet 
realize  that  he  can  obtain  such  credit  at  a  bank. 

Our  farmers  as  a  class  are  exceedingly  reluctant  "to  go  each  other's 
security."  Two-name  paper  is  mostly  confined  to  commercial  trans- 
actions. 

A  college  professor  in  the  state  of  Washington  informs  me 
that  short-time  loans  to  farmers  are  common  in  that  state,  but 
that  frequently  the  rate  of  interest  charged  is  two  per  cent  higher 
than  that  on  commercial  loans — the  explanation  commonly  given 
being  that  a  farmer  borrowing  generally  reduces  the  resulting 
deposit  credit  more  rapidly  than  does  a  merchant. 

In  the  Southern  states,  particularly  in  the  cotton,  rice,  and 
tobacco  sections,  the  use  of  crop  liens  for  short-time  loans  appears 
to  be  much  greater  than  in  other  sections  of  the  country.  Such 
meager  testimony  as  I  have  been  able  to  secure  seems  to  show 
that  the  amount  of  short-time  agricultural  credit  extended  by 
banks  in  the  South  is  relatively  small  but  rather  rapidly  increas- 
ing. The  banks  are  catering  more  and  more  to  this  class  of 
business. 

Other  evidence  might  be  cited,  but  the  above  gives  a  fair 
picture  of  the  situation  as  revealed  by  all  the  testimony  received — 
a  confused  picture  of  widely  varying  conditions.  Public  opinion 
is  now  being  aroused  on  the  subject  of  agricultural  credit,  and 


AGRICULTURAL   CREDIT  39 

pressure  is  liable  to  be  brought  for  hasty  and  perhaps  radical 
legislation.  Obviously,  the  first  step  to  be  taken  in  the  interest 
of  a  sane  solution  of  the  problem  is  to  find  out  exactly  what 
the  problem  is.  To  this  end  the  writer  would  urge  strongly  the 
need  of  investigations  by  the  Comptroller  of  the  Currency  and 
by  the  various  state  banking  departments  of  the  present  facilities 
and  practices  in  the  matter  of  agricultural  loans.  In  view  of 
the  increasing  public  interest  in  the  subject  the  investigations 
cannot    be    undertaken    too   soon. 

Although  the  farmers  in  any  section  of  the  country  may  not 
resort  to  the  banks  for  short-time  credit  it  does  not  follow  that 
they  are  not  receiving  such  credit.  As  a  matter  of  fact  they  are 
often  receiving  it  on  a  considerable  scale  and  in  the  most  ex- 
pensive way,  I.  c,  in  the  form  of  book  credits  with  merchants. 
It  is  a  common  practice  throughout  the  country  for  farmers  to 
run  up  book  accounts  with  local  merchants  during  the  spring 
and  summer  to  be  paid  in  the  fall  when  the  crops  are  sold. 
When  this  is  done  on  any  considerable  scale  the  farmer  probably 
pays  more  than  bank  interest  under  the  guise  of  prices ;  and  this 
is  particularly  true  when  he  obligates  himself  to  sell  his  crops 
to  the  creditor  merchant.  In  the  South  this  practice  is  carried  to 
the  extreme  in  the  familiar  "store-lien"  system  which  holds  many 
farmers  in  the  cotton  belt  in  a  condition  bordering  on  perpetual 
servitude.  The  custom  is  for  the  farmer  to  buy  supplies  of  the 
local  general  store  on  credit  for  the  year,  agreeing  to  sell  to  the 
merchant  his  cotton  crop  in  the  fall,  thereby  cancelling  the  debt. 
A  crop  lien  is  generally  given,  and  the  merchant  often  dictates 
the  character  and  the  amount  of  the  planting.  The  prices  paid 
for  cotton  under  this  system  are  liable  to  be  exceptionally  low, 
and  the  prices  paid  by  the  farmer  for  his  supplies  exceptionally- 
high.  The  system  has  proven  a  curse  to  many  sections  of  the 
South.  Witnesses  before  the  United  States  Industrial  Commis- 
sion estimated  the  interest  rates  imposed  by  this  system  at  from 
20  per  cent  upwards.  Mr.  George  K.  Holmes  of  the  United 
States  Department  of  Agriculture  testified : 

The   rate  of  interest  on  the  liens  on  the  cotton  crop  of  the  South,  it  is 

safe    to    say,    probably    averages    40    per    cent   a    year.     All    cotton    men  will 

agree  that  it  is  at  least  that.  The  store  system  of  the  South  is  a  sort 
of  peonage;  that  is  what  it  amounts  to  with  the  cotton  planter. 

Since  the  Industrial  Commission's  report  was  published  the 


40  SELECTED   ARTICLES 

banking  facilities  of  the  South  have  been  greatly  increased,  and 
the  banks  are  coming  into  closer  touch  with  farmers,  with  the 
result  that  the  store-lien  system  is  gradually  breaking  down. 

Another  form  of  credit  to  farmers  is  that  obtained  from  deal- 
ers in  farm  implements  and  machinery  which  the  farmers  fre- 
quently buy  on  time,  paying  interest  during  the  credit  period. 

One  informant,  who  has  been  a  bank  examiner,  writes  from 
California — and  his  testimony  is  applicable  to  many  other  sections 
of  the  country: 

The  new  generation  of  merchants  are  not  disposed  to  carry  the  farmer 
as  of  old  and  insist  that  overdue  accounts  be  covered  by  promissory  notes 
which  are  in  turn  hypothecated  with  their  bank.  In  other  words  a  clearer 
demarcation  of  function  is  being  gradually  brought  about  to  the  best  inter- 
ests of  all  concerned. 

Such  in  general  is  the  present  situation  in  the  United  States  in 
the  matter  of  short-time  agricultural  credit  as  evidenced  by  the 
very  indefinite  and  scant  information  available.  What  are  the 
causes?  Perhaps  in  them  will  appear  some  suggestions  for  the 
remedy. 

The  chief  reasons  for  the  backwardness  of  the  United  States 
as  compared  with  Europe  with  regard  to  agricultural  credit  may 
be  briefly  summarized  as  follows:  (i)  Our  wonderful  agricul- 
tural domain  where  good  land  could  be  had  almost  for  the  asking, 
and  where  for  generations  land  was  so  cheap  and  labor  and  capi- 
tal so  dear  that  intensive  cultivation  was  generally  unprofitable. 
(2)  The  prosperity  of  our  farmers  who  have  not  been  forced  by 
dire  necessity  to  resort  to  credit  as  were  the  farmers  of  Ger- 
many at  the  middle  of  the  last  century  when  the  Raififeisen 
cooperative  banks  were  first  organized.  (3)  The  nomadic  char- 
acter of  a  considerable  part  of  our  agricultural  population  as  it 
has  moved  continually  westward  in  taking  up  of  new  lands, 
and  more  recently  as  it  has  been  retracing  its  steps  or  moving 
northward.  (4)  The  isolation  of  our  farmers  in  this  country 
of  large  farms  and  "magnificent  distances."  (5)  The  rapid 
growth  of  the  manufacturing  and  commercial  business  of  the 
country — and  that  largely  in  the  hands  of  the  same  class  of 
people  who  control  the  bulk  of  the  banking  business. 

Add  to  these  circumstances  the  obstacles  which  farmers  al- 
ways encounter  in  the  matter  of  credit,  as  compared  with  manu- 
facturers and   merchants,   obstacles   such  as   the  uncertainty  of 


AGRICULTURAL   CREDIT  41 

crops  and  the  strongly  seasonal  character  of  the  farmer's  credit 
demands,  and  we  have  a  sufficient  explanation  for  the  backward- 
ness of  agricultural  credit  in  this  country. 

To  emphasize  most  of  these  causes,  however,  is  to  brand 
oneself  as  belonging  to  a  past  generation.  Our  domain  of  free 
arable  land  is  practically  gone ;  good  farms  must  be  bought, 
and  for  them  ever  increasing  prices  must  be  paid. 

The  era  of  hand  cultivation  is  giving  way  to  that  of  farm 
machinery  propelled  by  horse-power  and  even  by  steam,  gasoline, 
or  electricity,  with  its  resulting  great  increase  in  the  efficiency  of 
labor.  Eleven  years  ago  the  editor  of  TJie  Dakota  Farmer,  in 
his  testimony  before  the  United  States  Industrial  Commission, 
put  the  matter  tersely,  and  with  little  exaggeration,  as  affecting 
his  own  section  of  the  country,  at  least,  when  he  said :  "When  I 
first  worked  out  it  took  five  binders  to  follow  a  machine,  one 
man  to  rake  off,  and  one  to  carry  the  bundles  together.  Now 
the  hired  girl  frequently  drives  a  machine  that  does  the  whole 
business."  Some  idea  of  the  extent  of  this  increase  may  be 
obtained  by  reference  to  the  following  figures  compiled  from 
census   reports : 

Value  of  Far)n  Liiplcinciits  a)id  Macliincry  in  the  U.  S.^ 

Value.  Per  cent 

Year.  000,000  increase. 

1910 $1,265  69 

1900 750  52 

1890 494  22 

1880 407  50 

1870- 271  10 

1S60 246  62 

The  increase  in  the  value  of  farm  implements  and  machinery 
per  acre  of  land  in  farms  from  1900  to  1910  was  from  $0.89  to 
$1.44,  or  61.8  per  cent. 

An  analysis  of  the  figures  for  farm  machinery  by  geographic 
divisions  shows  a  marked  difference  in  the  rates  of  increase,  but 
the  tendency  in  all  sections  during  the  last  forty  years  has  been 
decidedly  upwards,  the  greatest  growth  having  been  witnessed 
in  the  decade  ending  1910.  During  that  decade  the  lowest  rate 
of  increase  in  any  section  was  that  of  New  England,  39  per  cent, 
and  the  highest  that  of  the  Mountain  states,  163  per  cent. 

^  Exclusive   of   Alaska  and   Hawaii. 
-  Values  in  gold. 


42  SELECTED   ARTICLES 

Another  development  which  is  making  larger  demands  upon 
the  farmer  for  working  capital  is  the  increasing  use  of  artificial 
fertilizers,  the  expenditure  fur  which  in  the  United  States  ap- 
proximately doubled  from  1880  to   1900. 

As  the  result  of  such  tendencies  and  of  the  rapid  depletion  of 
our  free  domain,  farming  in  the  United  States  is  losing  its  old 
time  kinship  to  mining  and  becoming  more  like  manufacturing. 
More  and  better  machinery  and  more  power  are  needed  on  most 
farms  in  the  interest  of  efficiency.  This  calls  for  short-time 
credit.  But  a  supply  of  good  machinery  requires  a  fair  sized 
farm  for  its  efficient  utilization — hence  the  need  for  larger  farms 
and  for  mortgage  credit  to  make  their  purchase  possible.  Upon 
this  subject  there  are  some  very  illuminating  data  in  Warren  and 
Livermore's  Agricultural  Survey  of  four  townships  in  Tompkins 
County,  N.  Y.,  from  which  the  following  is  quoted  : 

The  value  of  farm  machinery  increases  rapidly  with  the  size  of  the 
farm.  .  .  .  Anyone  who  has  ever  made  a  list  of  the  necessary  farm 
machinery  will  see  at  once  how  inadequately  these  small  farms  are  equipped. 
Yet  their  machinery  costs  nearly  twice  as  much  per  acre  as  that  on  the 
larger  farms  that  have  nearly  three  times  as  much  machinery.  Machinery 
can  be  used  more  effectively  on  large  farms.  One  mower,  one  hay  rake, 
one  tedder,  one  hay  loader,  one  corn  harvester,  one  grain  harvester,  one 
grain  drill,  one  manure  spreader,  one  potato  digger,  one  potato  planter, 
can  do  their  work  on  a  250  acre  farm  as  readily  as  on  a  small  farm.  Few 
of  the  small  farms  have  half  of  these  tools.  If  a  small  farm  does  have 
nearly  all  the  list,  it  cannot  use  them  enough  to  pay  for  the  investment. 
The  more  efficient  and  numerous  machines  become,  the  larger  our  farms 
should  be.  It  is  interesting  to  notice  how  many  of  the  tools  are  of  very 
recent  development.  Almost  half  of  the  value  of  farm  machinery  on  a 
well-equipped  farm  is  invested  in  machinery  that  has  been  perfected  in  the 
last   few   years. 

Much  the  same  situation  exists  in  regard  to  an  adequate 
equipment   of   horses. 

Three  or  four  horses  are  the  smallest  number  that  can  be  used 
efficiently  with  modern  machinery.  .  .  .  The  small  farms  have  not 
enough  horses  to  make  efficient  teams  and  yet  they  are  over-supplied  with 
horses  compared  with  their  area.  On  these  farms  there  are  only  fifteen 
acres  per  horse.  On  the  largest  farms,  one  horse  farms  three  times  this 
area,  with  no  resulting  decrease  in  crop  yields.  .  .  .  When  we  con- 
sider the  cost  of  keeping  a  horse  we  see  what  a  great  advantage  the  larger 
farms  have. 

Forces  like  these  are  counteracting  what  is  commonly  thought 
of  as  the  normal  tendency  of  agriculture  to  move  toward  more 


AGRICULTURAL   CREDIT  43 

intensive  cultivation  on  small  farms,  with  the  result  that  the 
average  amount  of  improved  farm  land  per  farm  actually  in- 
creased instead  of  diminishing  in  the  United  States  during  the 
last  decade.  This  does  not  mean  less  intensive  cultivation,  in 
fact  quite  the  contrary ;  it  means  more  intensive  cultivation,  but 
by  the  efficient  utilization  of  good  machinery  and  of  power.  It 
means  further,  as  said  above,  a  demand  for  mortgage  credit  for 
the  purpose  of  enlarging  farms — and  that,  at  rapidly  increasing 
farm  prices. 

The  farming  population  is  becoming  more  settled  now  that 
the  free  lands  are  practically  gone  and  the  frontier  has  dis- 
appeared. The  isolation  of  the  farmer  is  rapidly  becoming  a 
thing  of  the  past,  with  the  advent  of  rural  free  delivery,  rural 
telephone,  the  automobile,  and  the  parcels  post.  The  farmer  no 
longer  buys  gold-bricks  nor  is  duped  by  fraudulent  lightning- 
rod  schemes  except  in  the  pages  of  the  comic  supplements. 

When  seeking  credit  the  farmer  can  offer  better  security  than 
ever  before.  His  markets  are  larger,  better  organized,  more 
certain,  and  more  accessible.  The  risk  of  crop  failure  is  less, 
thanks  to  the  wonderful  progress  of  scientific  agriculture.  There 
are  few  pests  which  cannot  now  be  readily  controlled  by  the  in- 
telligent farmer,  who  takes  time  by  the  forelock.  The  problem 
of  moisture  is  growing  less  serious  every  year  with  the  improve- 
ments in  irrigation,  dry  farming,  and  the  more  scientific  diversi- 
fication  of   crops. 

If  the  time  is  ripe  for  a  greater  use  of  bank  credit  in  agricul- 
ture, how  is  that  credit  to  be  obtained?  Broadly  speaking  four 
methods  may  be  mentioned,  only  the  last  two  of  which  are  de- 
serving of  much  attention  at  the  present  time.  They  are : 
(i)  Establish  government  agricultural  banks;  (2)  Adopt  the 
Egyptian  plan  of  a  government  guaranty  to  an  agricultural  bank 
established  with  private  capital;  (3)  Encourage  the  farmers  to 
organize  cooperative  credit  societies  on  some  such  plan  as  the 
Raiffeisen  or  Schulze-Delitzsch  banks  of  Germany;  (4)  Utilize 
more  effectively  in  the  interest  of  the  farmer  our  present  bank- 
ing machinery,  and  improve  it  where  it  is  defective. 

The  suggestion  of  an  agricultural  bank  owned  and  operated 
by  government,  either  state  or  federal,  is  not  worthy  of  serious 
consideration  in  this  country  at  the  present  time.  The  history 
of  such  banks  both  in  Europe  and  America  has  generally  been  a 


41  SELECTED   ARTICLES 

disastrous  one,  although  a  few  have  succeeded.  Some  exist  to- 
day which  are  performing  useful  services  to  farmers,  notably  in 
the  line  of  mortgage  credit,  among  which  may  be  mentioned 
those  of  the  Australian  States  and  New  Zealand,  and  the  recently 
established  one  in  the  Philippine  Islands.  The  success  of  such 
institutions  is  not  such  as  to  justify  any  attempt  to  establish  them 
in  the  United  States,  at  least  until  every  reasonable  effort  has 
been  made  to  solve  the  problem  by  means  of  private  and  coopera- 
tive effort. 

When  one  considers  the  question  of  the  improvement  of  agri- 
cultural credit  in  the  United  States  one  instinctively  thinks  of 
the  cooperative  credit  banks  of  the  old  world,  because  of  their 
phenomenal  success  for  a  half  century  and  more,  the  simplicity 
of  their  structures,  the  ease  with  which  they  may  be  established, 
and  their  ready  adaptability  to  the  widely  varying  conditions 
found  in  a  great  country  like  the  United  States.  The  description 
of  the  wonderful  success  of  these  institutions  as  told  by  Henry  W. 
Wolff  in  his  People's  Banks  reads  like  a  fairy  story.  Although 
the  success  of  cooperative  banks  has  been  great  in  nearly  every 
country  of  Continental  Europe  nowhere  else  has  it  been  so  great 
as  in  Germany,  the  country  of  their  origin,  and  it  is  to  Germany 
one  naturally  turns  first  for  suggestions.  There  we  find  four 
types  of  cooperative  credit  banks,  Landschaften,  Ritterschaften, 
Schulze-Delitzsch  banks  and  Raiffeisen  banks.  The  first  two  are 
cooperative  associations  loaning  money  on  land  mortgages,  and 
securing  funds  largely  through  the  issue  of  bonds  against  the 
collective  mortgages.  Being  concerned  with  long-time  mortgage 
credit  they  do  not  fall  within  the  province  of  this  paper.  The 
other  two  types  of  banks  deal  especially  with  short-time  credit, 
the  one  chiefly  in  the  towns  and  cities,  and  the  other  with  farm- 
ers in  the  rural  communities.  It  is  with  the  latter  that  we  are 
most  concerned.  Let  us  therefore  consider  briefly  the  essential 
features    of    the   Raiffeisen    system. 

These  features  are:  (i)  Organization  on  the  strictly  coopera- 
tive principle,  none  but  members  having  the  right  to  borrow, 
although  non-members  may  make  deposits.  (2)  Limitation  of 
loan  operations  to  a  very  small  area  in  which  all  farmers  are 
acquainted  with  each  other.  A  bank's  field  of  business,  the 
founder  believed,  should  not  cover  a  parish  of  less  than  400 
people  nor  of  more  than  1500.    The  banks  were  to  be,  therefore. 


AGRICULTURAL   CREDIT  45 

purely  neighborhood  affairs.  There  is  a  sympathetic  but  well- 
informed  neighborhood  opinion  which  prevents  the  squandering 
of  loans.  (3)  Unlimited  liability  of  all  members  for  the  debts 
of  the  bank,  a  necessary  corollary  of  which  is  the  provision  that 
membership  is  obtained  only  by  election  by  those  already  mem- 
bers. (4)  The  working  capital  of  the  bank  is  obtained  chiefly 
from  the  following  sources:  (a)  Small  savings  "drawn,  either 
from  within  the  area  covered  by  the  bank,  in  which  case  it  comes 
both  from  members  and  non-members,  the  former  being  re- 
warded where  possible  at  slightly  higher  rates  in  order  to  en- 
courage membership ;  or  from  without  the  area,  in  which  case  it 
of  necessity  comes  from  non-members.''  (b)  Loans  from  the 
provincial  bank  of  the  district,  or  more  importantly  from  the 
central  bank  of  the  Empire  at  which  the  local  bank  keeps  a 
current  account  and  with  which  it  may  rediscount  its  paper. 
Funds  are  also  sometimes  obtained  from  other  banks  or  from 
private  individuals,  (c)  A  purely  nominal  share  capital  which 
the  banks  did  not  originally  have,  and  which  they  have  been 
forced  against  their  will  to  issue.  The  requirement  is  now  usually 
met  by  the  issue  of  a  few  low-priced  shares  of  which  no  member 
can  hold  more  than  one  and  upon  which  no  dividend  is  paid, 
(d)  Two  surplus  funds  called  reserve  funds ;  one  used  exclusively 
to  cover  losses,  and  the  other  being  the  principal  reserve  fund 
(Stiftungsfimd),  commonly  used  for  "positive  improvements, 
such  as  the  extension  of  the  premises  or  the  establishment  of  a 
burial  fund."  In  this  fund  must  be  placed  two  thirds  of  the  an- 
nual profits.  The  fund  cannot  be  distributed  among  the  members, 
even  though  the  bank  be  dissolved.  In  such  a  case  it  is  held  in 
trust  for  a  time  for  a  new  bank,  should  one  be  established,  and  if 
no  such  bank  is  established  it  must  be  used  for  some  work  of 
public  utility.  A  recent  publication  of  the  International  Institute 
of  Agriculture  analyzes  the  total  working  capital  of  the  rural 
banks  of  Germany  for  the  year  1909  as  follows : 

Amount 

in  marks.       Percentage. 
000.000. 

Share    capital    22.4  1.2 

Reserves     51.0  2.6 

Deposits  on  cuirent  account 1§§1  ^-f 

Savings   deposits    1,455.6  75.2 

Other  liabilities    217.5  11.2 

Total  worltiTig  capital 1,935.5  100.0 


46  SELECTED   ARTICLES 

The  striking  fact  brought  out  by  these  figures  is  that  out  of 
nearly  two  bilHon  marks  placed  at  the  disposal  of  farmers,  less 
than  1 1. 2  per  cent  was  furnished  by  outsiders,  while  more  than 
88.8  per  cent  was  provided  by  the  savings  and  other  deposits  of 
the  farmers  themselves  and  of  the  local  public.  (5)  A  fifth  fea- 
ture of  the  Raififeisen  system  is  that  the  bank's  administrative 
organization  is  simple  and  democratic.  Final  authority  on  local 
questions  resides  in  the  general  meeting  in  which  every  member 
has  one  vote.  There  is  elected  annually  a  committee  of  manage- 
ment consisting  usually  of  five  or  six  directors  who  meet  weekly. 
As  a  check  upon  this  executive  committee  there  is  also  elected 
annually  a  council  of  supervision  consisting  of  from  six  to  nine 
members.  A  biennial  audit  is  made  of  the  accounts  of  each  bank 
by  an  accountant  employed  by  the  district  or  central  union.  The 
books  of  the  bank,  except  the  individual  deposit  ledger,  are  open 
to  the  inspection  of  all  members.  Officers  of  the  local  banks  serve 
without  compensation,  except  the  treasurer  who  has  no  vote  in 
the  making  of  loans.  The  typical  Raiffeisen  bank  is  described  by 
Fay  as  "a  small  single  room  probably  at  the  back  of  a  farm 
building,  opened  twice  a  week  and  presided  over  by  a  single 
occupant,"  the  treasurer.  (6)  Advances  take  two  forms :  the 
ordinary  loan  (of  which  the  name  is  sufficiently  descriptive), 
and  the  current  account  which  is  similar  to  the  Scotch  cash 
credit.  The  latter  constitute  about  a  third  of  the  total  and  show 
a  tendency  to  increase  in  proportion  to  the  ordinary  loans.  The 
period  of  the  ordinary  loan  varies  from  six  months  to  three 
years ;  and  in  exceptional  cases  it  may  be  even  longer.  Loans 
are  repayable  in  instalments  covering  interest  and  part  of  the 
principal,  or  in  lump  sums.  Banks  reserve  the  right  to  call  a 
loan  on  four  weeks'  notice.  The  average  credit  advanced  per 
member  is  500  marks,  and  the  average  interest  rate  probably 
somewhere  between  four  and  five  per  cent.  Although  mortgage 
and  other  collateral  security  is  sometimes  accepted,  the  banks' 
chief  reliance  is  personal  security,  and  the  great  bulk  of  the 
loans  are  made  on  two-name  paper. 

The  Raiffeisen  banks  are  organized  into  provincial  federations 
with  provincial  banks  at  their  head,  and  these  in  turn  into  a 
national  federation  with  a  central  bank  at  its  head.  These  pro- 
vincial banks  and  the  central  bank  "equalize  the  need  of  credit  of 
the  individual  banks,  supplying  them  with  money  when  required 


AGRICULTURAL   CREDIT  47 

and  employing  their  surplus  funds.  A  large  proportion  of  the 
German  cooperative  banks  and  other  cooperative  agricultural 
societies  are  federated  in  a  single  national  organization,  the 
National  Federation  of  Darmstadt. 

Such  are  the  leading  features  of  the  greatest  agricultural  credit 
system  of  the  world.  To  the  American  the  surprising  thing  about 
it  all  is  that  such  cooperative  credit  banks  are  practically  un- 
known in  the  United  States,  although  there  has  been  a  remarkable 
development  here  in  recent  years  of  other  forms  of  cooperation 
among  farmers.  This  surprise  is  the  greater  when  one  bears  in 
mind  that  "whole  counties  have  been  populated  in  the  Northwest 
by  European  agriculturists  who  came  from  neighborhoods  where 
they  were  familiar  with  agricultural  cooperative  credit,  and  yet 
not  a  society  of  cooperative  credit  for  these  immigrants  has  been 
established  from  the  beginning  to  the  present  time." 

A  real  beginning  in  the  direction  of  cooperative  agricultural 
credit  was  made  last  year  through  the  influence  of  the  Jewish 
Agricultural  and  Industrial  Aid  Society  (174  Second  Ave.,  New 
York  City).  Although  the  history  of  these  credit  unions  has  been 
brief  their  success  has  been  pronounced.  Up  to  June  30  of  this 
year  the  average  age  of  these  unions  was  but  seven  months,  yet 
their  reports  of  that  date  showed  a  total  membership  of  240, 
shares  outstanding  amounting  to  $4,180,  and  they  had  already 
granted  loans  aggregating  $17,755. 

As  previously  mentioned,  the  State  Department  at  Washing- 
ton, through  our  American  embassies  abroad  and  at  the  instiga- 
tion of  President  Taft,  is  making  an  investigation  of  cooperative 
credit  in  Europe.  The  results  are  soon  to  be  published  and  are 
to  be  used  by  the  President  as  a  basis  of  recommendations  for 
some  action  in  this  country.  Until  that  report  is  published  it 
would  be  premature  to  make  many  suggestions  concerning  the 
adaptation  of  the  Raiffeisen  system,  the  Schulze-Delitzsch  system, 
or  any  other  system  of  cooperative  agricultural  credit  to  the  needs 
of  the  United  States.  What  is  needed  now — and  possibly  about 
all  that  will  be  needed  in  the  future — is  a  campaign  of  education 
among  the  farmers  themselves  rather  than  one  of  legislation ; 
although  the  development  of  such  societies  will  doubtless  be 
furthered  in  many  states  by  legislation,  such  as  was  recently 
enacted  in  Massachusetts  (ch.  419,  Acts  of  1909),  freeing  them 
from  some  of  the  hampering  provisions  of  the  general  banking 


48  SELECTED   ARTICLES 

act  of  the  state.  Conditions  are  so  widely  different  in  different 
sections  of  tlie  country,  and  among  different  classes  in  the  same 
section,  that  cooperative  agricultural  credit  societies  will  need  to 
be  given  a  fairly  free  hand  in  such  matters  as  limited  or  unlimited 
liability,  the  amount  of  share  capital,  receipt  of  deposits,  etc., 
so  that  they  may  adapt  themselves  to  local  needs.  A  reasonable 
amount  of  government  supervision  on  the  part  of  the  banking 
departments  of  the  states  seems  desirable. 

Passing  now  to  the  question  of  the  better  utilization  of  our 
existing  banking  machinery,  we  may  consider  it  first  from  the 
standpoint  of  the  government,  then  from  that  of  the  banks,  and 
finally  from  that  of  the  farmers  themselves. 

The  provisions  of  the  national  banking  act  (Revised  Statutes, 
sec.  5137)  are  too  rigid  in  the  matter  of  loans  on  real  estate 
security.  National  banks  are,  of  course,  intended  to  be  banks  for 
business  men,  and  their  assets  should  be  quick  assets  in  so  far  as 
their  liabilities  are  quick  liabilities.  But  it  should  not  be  over- 
looked that  the  modern  farmer  is  a  business  man,  that  he  needs 
active  credit  for  the  efficient  conduct  of  his  current  business,  and 
that  land  is  the  only  kind  of  collateral  many  farmers  can  give 
that  is  acceptable  to  cankers.  Many  worthy  farmers  are  not  will- 
ing and  some  are  not  able  to  secure  satisfactory  endorsers  to  their 
paper.  Crop  liens,  except  in  the  South,  are  not  usually  very 
acceptable  to  banks.  The  ability  of  the  farmer  to  give  mortgage 
security  to  national  banks  in  case  of  need  would  often  prove  a 
great  help.  Furthermore,  now  that  a  majority  of  our  national 
banks  have  savings  departments,  and  that  savings  deposits 
might  wisely  be  made  withdrawable  subject  to  advance  notice,  it 
is  not  unreasonable  that  these  banks  should  be  permitted  to  in- 
vest at  least  a  substantial  part  of  their  savings  funds  in  the  same 
kinds  of  mortgage  securities  that  are  open  to  the  investment  of 
funds  of  savings  banks ;  provided,  of  course,  that  due  care  be 
taken  to  prevent  the  juggling  of  accounts  between  the  commer- 
cial department  and  the  savings  department  of  the  bank. 

Another  form  of  desirable  legislation  in  the  interest  of  the 
farmer  consists  in  the  abandonment  of  our  unscientific  bond 
secured  bank-note  circulation  for  a  scientific  system,  and  in  the 
rendering  of  our  deposit  currency  more  elastic.  The  more  the 
farmer  resorts  to  bank  credit  as  a  means  of  financing  his  current 
business  the  more  will  he  suffer  from  the  seasonal  inelasticity  of 


AGRICULTURAL   CREDIT  49 

our  bank-note  and  deposit  currency.  Farming  business  is  pre- 
eminently seasonal  in  character;  the  farmers  over  the  greater 
part  of  the  country  need  funds  most  at  about  the  same  times  of 
the  year,  i.  e.,  the  fall  and  spring.  A  great  increase  in  the  demand 
for  currency  and  capital,  say  in  the  fall,  under  an  inelastic  cur- 
rency and  credit  system  like  our  own,  means  to  the  farmer,  high- 
est interest  rates  at  just  the  time  when  he  needs  most  to  borrow, 
greatest  scarcity  of  cash  at  just  the  time  when  his  need  for  cash 
is  the  most  urgent,  and  prices  depressed  by  a  tight  money  market 
at  the  time  of  the  year  when  he  has  most  to  sell.  It  is  doubtful 
if  any  class  of  people  in  the  country  would  benefit  more  from  a 
thoroughgoing  reform  of  our  banking  system  than  would  the 
farmers. 

The  apportionment  of  responsibility  between  farmer  and 
banker  for  their  not  having  gotten  together  better  is  an  impos- 
sible task.  Although  some  exceptions  must  be  made,  particularly 
in  the  IMiddle  West,  as  a  general  proposition  neither  has  appreci- 
ated the  opportunity  which  the  other  offered. 

The  banker  must  be  brought  to  realize  that  one  of  the  best 
kinds  of  paper  in  the  world  is  short-time  business  paper  bearing 
the  names  of  two  responsible  farmers.  He  should  be  an  adviser 
and  friend  to  the  farmer  as  much  as  to  the  city  customer.  He 
should  make  the  farmer  feel  that  a  productive  loan  to  him  is  not 
of  the  nature  of  a  favor  reluctantly  granted — as  so  many  farm- 
ers complain — but  rather  a  business  proposition  profitable  to  both, 
as  gladly  given  as  it  is  received.  He  should  further  cooperate 
with  the  local  business  men  in  preparing  financial  ratings  of 
farmers,  to  fill  the  gap  left  by  the  inability,  to  be  hoped  tempo- 
rary', of  mercantile  credit  agencies  to  rate  farmers  as  extensively 
as  they  do  other  business  men  of  like  capital. 

The  farmer,  on  the  other  hand,  must  be  educated  by  the 
banker,  the  press,  and  the  agricultural  school  and  college,  to  the 
advantages  of  credit  as  a  means  to  the  more  efficient  working  of 
his  farm.  This  should  be  done  with  caution  for  credit  is  a  two- 
edged  sword.  The  farmer  should  be  encouraged  to  borrow  only 
when  it  is  very  clear  that  he  can  use  additional  capital  so  pro- 
ductively that  it  will  pay.  But  what  industrious  farmer  could 
not  use  profitably  some  additional  capital  every  year,  could  he 
obtain  it  at  as  reasonable  rates  as  does  tlie  merchant?  The 
farmer  must  learn  to  keep  careful  accounts.     He  must  be  made 


50  SELECTED   ARTICLES 

to  realize  that  the  banks  are  open  to  him  as  to  other  business 
men,  and  that  the  bulk  of  the  country's  short-time  commercial 
loans,  as  likewise  of  the  agricultural  loans  of  Europe,  are  made 
on  the  very  same  security  he  is  capable  of  giving,  /.  c,  two-name 
paper  of  honest,  industrious  business  men. 


North    American    Review.     199:796-800.     May,    1913. 
Rural  Credit.     Marion   Sherwood  Lahman. 

Vinita,  Okla.,  April  9,  1914. 

Sir, — I  have  just  read  Mr.  Van  Courtland's  article,  "What  Is 
Agricultural  Credit?"  in  the  April  NortJi  American  Review,  and 
have  been  moved  to  express  myself  on  a  different  phase  of  the 
same  subject. 

The  majority  report  of  the  American  Commission  which  was 
sent  to  Europe  last  summer  to  study  the  rural  credit  systems  in 
operation  in  the  different  countries  showed  that  the  members 
were  in  favor  of  pushing  the  rural  credit  movement  in  America. 
There  was,  however,  a  minority  which  questioned  whether  our 
country  was  yet  wholly  prepared  for  such  a  step. 

I  was  appointed  by  Governor  Cruce  to  represent  Oklahoma, 
and  traveled  with  the  Commission  during  the  entire  trip.  We 
were  treated  with  great  courtesy  and  friendliness  by  the  repre- 
sentatives of  the  different  governments,  and  shown  the  best  they 
had  along  the  lines  of  our  investigation.  Naturally  they  would 
not  show  us  the  failures,  and  there  are  failures,  although,  as  a 
whole,  the  co-operative  movement  in  Europe  has  been  a  great 
success.  This  made  some  of  us  anxious  to  do  a  little  investigat- 
ing on  our  own  account.  Also  it  seemed  to  us  that  the  condi- 
tions of  the  home  and  the  social  life  of  the  peasant  farmers 
would  form  an  important  piece  of  evidence.  This  the  Commis- 
sion could  not  undertake,  partly  from  lack  of  time  and  partly 
from  the  obvious  impossibility  of  strangers  getting  at  the  intimate 
details  of  the  life  of  a  people  whose  language  they  could  not 
speak. 

For  the  purpose  of  studying  this  side  of  the  subject  I  re- 
mained three  months  longer  after  the  Commission  went  home. 
The  things  I  learned  in  that  second  three  months  made  me  feel 


AGRICULTURAL   CREDIT  51 

that  we  should  proceed  with  great  caution  in  urging  upon  our 
people  a  system  that  has  succeeded  under  conditions  so  radically 
different  from  anything  we  have  in  the  United  States. 

I  do  not  wish  to  discourage  the  co-operative  movement,  but 
I  do  wish  very  earnestly  to  call  attention  to  some  of  the 
stumbling-blocks  in  the  way. 

We  know  that  those  farmers  who  most  need  credit  have  diffi- 
culty in  securing  either  short  or  long  term  loans ;  that  the  pro- 
ducer of  foodstuffs  does  not  receive  a  price  in  proper  proportion 
to  the  cost  to  the  consumer;  that  in  certain  sections  farms  are 
being  abandoned.  Agriculture  has  not  kept  up  with  the  times, 
and  beyond  a  doubt  our  agricultural  conditions  must  be  improved. 

The  one  remedy  generally  suggested  for  the  sum  total  of  these 
ills  is  cheap  and  easy  rural  credit.  Glowing  reports  of  the  suc- 
cess of  the  co-operative  rural  banks  in  Europe  have  strengthened 
a  belief  that  our  farmers  should  set  up  similar  institutions.  Ad- 
vocates of  the  movement  assert  unreservedly  that  agricultural 
credit  will  increase  the  yield  of  the  land,  reduce  the  cost  of  living, 
and  keep  our  rural  population  from  deserting  to  the  cities.  Quod 
crat  nondiim  demonstrandum! 

Before  entering  upon  a  discussion  as  to  the  advisability  of 
trying  it  in  the  United  States,  we  should  know  exactly  what  the 
European  co-operative  rural  credit  system  is,  the  conditions 
under  which  it  is  operated,  and  the  character  and  environment 
of  the  people  benefited.  Since  these  associations  vary  but  little 
in  the  various  countries,  and  most  of  them  are  built  on  the 
Raiffeisen  plan,  a  definition  of  the  latter  will  serve  for  the  whole. 
A  typical  Raift'eisen  bank  is  a  registered  society  with  unlimited 
liability.     The  principal  features  are  these : 

Limitation  of  membership  to  one  community  or  village,  to 
secure  mutual  personal  knowledge  of  the  standing  of  members. 

Loans  only  for  productive  purposes. 

Loans  only  to  members. 

Unlimited  liability  of  members. 

Permanent  indivisible   reserve   fund. 

Short-term  credit  on  personal  guarantee. 

Credit  for  long  periods  with  facilities  for  repayment  by  in- 
stalments. 

Absence  of  profit-seeking,  dividends  if  paid  being  limited. 

Office-holders,  except  secretary,  not  paid  for  their  services. 


52  SELECTED   ARTICLES 

Promotion  of  moral  as  well  as  material  advancement  of 
members. 

Tlie  main  idea  of  the  Raiffeisen  plan  is  the  using  of  character 
as  an  asset;  the  giving  of  credit  on  personal  security;  and  it 
follows  that  the  success  of  a  financial  institution  of  this  sort 
depends  very  largely  on  the  permanency  of  the  community  and 
upon  the  intimate  knowledge  each  member  has  of  his  neighbors' 
personal  afifairs,  ability,   and  moral   standing. 

The  first  question  asked  of  a  man  who  comes  to  borrow  of  a 
bank  of  this  kind  is,  "What  are  you  going  to  do  with  the  money?" 

Perhaps  the  man  answers,  "Buy  a  cow." 

A  committee  then  decides  whether  he  needs  a  cow,  and,  if  so, 
whether  he  can  make  a  cow  pay,  before  letting  him  have  the 
money.  If  he  secures  the  loan,  his  neighbors  watch  to  see  that  he 
uses  it  for  his  avowed  purpose,  and  that  he  takes  proper  care  of 
his  investment. 

Supervision  of  this  sort  is  necessary  when  a  man  uses  his 
character  as  collateral,  and  conditions  which  permit  of  sucli  super- 
vision are  imperative. 

Rural  conditions  in  Europe  and  in  America  are  widely  dis- 
similar. The  European  peasant  and  the  American  farmer  have 
radically  dififerent  habits,  ideas,  and  ambitions.  From  feudal 
times  the  peasants  have  lived  in  villages,  or  communities  as 
they  are  properly  called,  since  the  dwellers  are  all  of  one  race, 
and  often  through  intermarriage  of  a  close  interrelationship. 
They  have  the  same  customs,  the  same  standards  of  living,  and 
the  same  religion.  This  last  is  a  most  powerful  bond,  since  each 
farming  community  has  its  own  local  church  and  a  resident  priest 
who  takes  an  active  interest  in  the  material  as  well  as  the  spirit- 
ual welfare  of  his  flock  and  is  usually  the  leader  in  any  move- 
ment for  their  advancement.  The  European  farmer  rarely  moves 
from  one  locality  to  another,  but  clings  to  the  farm  where  he 
was  born,  and  where  very  likely  his  father  and  his  grandfather 
before  him  spent  their  lives.  This  permanency  of  residence  gives 
the  co-operative  spirit  the  setting  it  must  have  for  development. 
His  standard  of  living  is  low ;  he  eats  coarse,  cheap  food ;  he 
uses  farm  carts  that  were  made  by  his  grandfather ;  his  home 
has  but  little  furniture ;  the  clothing  of  his  family  is  made  for 
warmth  and  wear,  with  no  attempt  at  style.  There  is  no  aping 
of  the  gentility,  in  the  matter  of  clothes,   food,  or  amusement, 


AGRICULTURAL   CREDIT  53 

no  struggle  whatever  to  live  beyond  class  means.  All  members 
of  the  family,  including  grandmother  and  the  cow,  work  in  the 
fields,  so  there  is  little  expense  for  hired  labor.  The  average 
peasant  is  not  educated  in  books  nor  by  travel.  He  is  slow,  super- 
stitious, and  conservative.  Moreover,  he  has  respect  for  author- 
ity, whether  exercised  by  king,  count,  or  priest,  and  here  enters 
another  factor  in  the  problem.  For  whenever  and  wherever  a 
co-operative  association,  financial  or  otherwise,  has  been  started 
it  has  been  done,  not  by  the  peasants  themselves,  but  by  some 
philanthropic  power  or  person,  government,  lord  of  estate,  or 
religious  leader.  There  is  in  each  country  some  one  high  in 
authority  who  preaches  the  doctrine  of  co-operation  and  sets  in 
motion  the  local  powers. 

Italy  has  Luzatti  and  Wollemborg,  backed  by  the  active  inter- 
est of  Victor  Emmanuel ;  Hungary  had  Karolyi ;  Germany  had 
Raiffeisen  and  Schultze-Delitzsche ;  and  Ireland  has  Sir  Horace 
Plunkett. 

In  Italy  agriculture  receives  assistance  from  the  crown  and 
from  titled  owners  of  large  estates  who  partly  from  altruism, 
partly  from  necessity,  have  instituted  co-operative  systems  for 
the  benefit  of  their  tenants.  In  Hungary  all  popular  agricultural 
measures  are  undertaken  and  managed  by  the  government  or  by 
the  nobles.  In  Austria  there  are  both  governmental  and  popular 
societies.  In  Germany  the  Raiffeisen  societies  have  not  received 
government  aid,  but  were  started  and  supervised  by  persons  of 
philanthropic  motives  who  had  more  education  and  better  business 
judgment  than  the  peasants.  In  France,  where  the  Credit  Foncier 
does  not  follow  the  Raiffeisen  type,  the  rural  banks  are  aided 
by  the  state  bank.  In  England  there  are  few  co-operative  so- 
cieties, and  those  there  are  usually  owe  their  existence  to  some 
person  of  title.  In  Ireland  pubHc-minded  lords  and  ladies  are 
preaching  vigorously  the  doctrine  of  cooperation  to  an  erstwhile 
reluctant  constituency. 

Besides  the  co-operative  credit  banks  there  are  co-operative 
societies  for  the  purpose  of  preparing  and  marketing  farm  pro- 
duce, creameries,  slaughter-houses,  and  the  like ;  and  there  are 
other  societies  for  supplying  farm  necessities  to  the  members. 
These  things  are  as  important  helps  to  agriculture  as  is  credit. 

Again,  Europeans  farm  more  scientifically  than  we  do.  In- 
stead of  skimming  over  as  many  acres  as  possible,  small  holdings 


54  SELECTED   ARTICLES 

intensively  cultivated  are  the  rule.  The  land  is  carefully  con- 
served by  fertilization,  rotation  of  crops,  and  hand  cultivation, 
so  that  the  yield  per  acre  is  much  greater  than  with  us.  Another 
advantageous  circumstance  is  the  dense  population,  creating  for 
produce  a  market  close  at  hand,  with  slight  transportation  ex- 
penses. Perishable  commodities  like  green  vegetables  and  fruit 
are  taken  by  the  producer  liimself  to  the  market-place  and  trans- 
ferred to  the  consumer  witliout  the  intervention  of  commission 
man  or  grocer. 

Here,  then,  are  the  European  conditions : 

The  rural  population  segregated  into  permanent  communities 
where  each  man  knows  intimately  his  neighbors. 

A  community  made  up  of  members  of  one  race,  interrelated, 
with  the  same  habits  and  ideas,  the  same  religion,  the  same 
standard  of  living,  and  that  a  low  one. 

Farmers  submitting  to  leadership  of  some  person  of  higher 
class. 

Rural  credit  banks  receiving  either  government  or  philan- 
thropic supervision. 

Co-operation  in   buying  and  selling. 

Small  farms  intensively  cultivated. 

Conservation  of  the  soil. 

A  dense  population  making  a  near  market  for  produce. 

All  these  things  are  favorable  to  the  growth  of  the  co-opera- 
tive spirit,  and  the  leaders  of  the  movement  themselves  say  that 
rural  credit  has  succeeded  in  Europe  on  account  of  the  condi- 
tions, not  in  spite  of  them.  For  on  the  Continent  co-operation 
has  succeeded.  There  have  been  failures,  but  the  movement  as 
a  whole  has  been  a  success. 

Now  turn  to  our  own  country.     We  have  no  aggregation  of 
farmers'  dwellings,  no  communities.     Our  rural  population  live 
;     in  solitary  houses  usually  set  apart  on  account  of  the  relatively 
large  areas  of  the  farms.     The  farmers  do  not  see  one  another 
/  )     often  enough  to  become  intimately  acquainted.     As  a   rule,  the 
'     individuals  of  any  one  district  differ  in  ancestry,  religion,  ideas, 
and  habits.     There  is  no  tie  that  binds  one  farmer  to  another 
I     any  more  than  there  is  between  farmer  and  townsman. 
'  The  average  American  farmer  is  intelligent,  independent,  am- 

bitious, eager  for  new  experiences,  ready  to  sell  and  move  on, 
sending  his  children  to  town  to  be  educated,  leaving  the  farm  him- 


AGRICULTURAL   CREDIT  55 

self  if  speculation  ofifers.  He  has  not  a  co-operative  spirit;  he 
does  not  wish  his  individual  action  hampered,  and  is  averse  to 
indorsing  another's  liability.  He  takes  orders  from  no  one, 
resents  supervision,  and  is  suspicious  of  altruistic  services.  If, 
say,  a  banker  should  try  to  advise  and  supervise  the  affairs  of  a 
farming  district,  he  would  very  probably  be  told  to  mind  his 
own  business  or  else  asked  what  he  expected  to  make  out  of  it. 

With  a  mass  of  people  of  these  characteristics,  only  classed 
together  because  of  their  occupation,  the  situation  is  so  diametri- 
cally opposite  to  that  in  Europe  that  the  fact  of  the  success  of 
the  rural  credit  movement  in  the  latter  region  can  have  little 
bearing  on  how  it  would  work  in  this  country.  Those  forms  of 
rural  co-operation  that  have  been  tried  in  the  United  States — 
farmers'  granges,  co-operative  creameries,  and  grain  elevators — 
generally  have  failed.  There  is  no  doubt  that  co-operation  on 
many  lines  would  be  a  good  thing  for  the  farmers  if  it  could  be 
made  to  work.  It  will  do  no  harm  to  urge  them  into  the  spirit 
of  the  thing.  Let  them  try  a  co-operative  association  for  buying 
seed  and  fertilizer,  or  a  creamery,  or  a  cow-testing  society.  If  a 
company  of  farmers  could  make  a  success  of  something  like 
that,  they  might  be  prepared  to  approach  the  rural  bank  idea. 
But  if  they  fail  in  the  simpler  operation,  how  can  they  be  ex- 
pected to  succeed  in  the  greater? 

In  the  older  settled  farming  regions  where  the  population  is 
more  stable,  a  trustworthy  farmer  can  secure  a  short-time  loan 
from  the  local  bank  on  his  personal  note.  Without  the  formation 
of  a  co-operative  society  he  utilizes  his  character  as  security  in 
the  same  way  as  the  member  of  a  Raiffeisen  bank,  and  this  is 
possible  because  the  same  conditions  are  present  which  make 
possible  the  existence  of  that  bank. 

Lakefield,  Minnesota,  has  a  series  of  co-operative  enterprises 
— bank,  grain  elevator,  creamery,  supply  house — that  are  being 
operated  satisfactorily.  But  Lakefield  also  has  that  European 
factor,  a  leader.  Mr.  James  Caldwell  is  a  man  of  keen  business 
ability  who  first  preached  the  co-operative  idea,  then  founded, 
then  supervised  the  management  of  all  these  associations.  Lake- 
field  was  willing  to  be  led  by  the  superior  judgment  of  Mr. 
Caldwell,  and  has  profited  accordingly.  If  we  had  leaders  enough 
the  proposition  would  be  simplified. 

It  should  be  borne  in  mind  that  the  welfare  of  the  rural  pop- 


56  SELECTED   ARTICLES 

ulation  docs  not  depend  wholly  upon  credit.  A  lot  of  our 
farmers  need  to  be  taught  better  farming,  thrift,  and  business 
sense.  All  of  them  are  not  failures,  and  where  one  is  found  who 
knows  how  to  farm  and  who  puts  as  much  brains  into  his  work 
as  a  successful  banker  puts  into  his,  then  we  find  a  farmer  who 
is  able  to  finance  himself.  Legislation  cannot  make  a  man 
prosperous,  but  education  may.  We  already  have  agricultural 
schools,  exhibit  trains,  traveling  lectures,  experiment-station  bul- 
letins, and  farm  journals  which  are  doing  good  work  in  agri- 
cultural education.  Townspeople  are  waking  up  to  the  fact  that 
rural  conditions  affect  them  as  much  as  anybody.  Agriculture  is 
the  most  indispensable  industry,  and,  whether  it  flourishes  or 
declines,  affects  every  class ;  yet  it  is  the  one  industry  which  has 
failed  to  keep  up  with  the  times.  Fortunately  we  are  at  last 
aroused  to  the  rural  need,  and  the  widespread  discussions  that 
are  taking  place  cannot  fail  to  do  some  good. 

The  farmer  alone  cannot  work  out  his  own  salvation.  Suc- 
cessful people  in  other  lines  must  take  hold  and  help  him.  But 
for  the  very  reason  that  we  are  all  interested  in  the  welfare  of 
farming  people  the  greatest  caution  should  be  exercised  in  urg- 
ing untried  schemes  upon  them.  Rather  let  us  go  slowly,  one 
step  at  a  time,  until  the  road  is  safe  and  sure  under  our  feet. 


Lubin,  David.     The  Landschaft;   Co-operative  Rural  Credit. 

A  Letter  to  Senator  Duncan  U.  Fletcher. 

In  my  opinion  there  is  no  reason  why  the  Landschaft  can  not 
be  adopted  in  the  United  States  with  the  same  safeguarding 
features  that  operate  in  Prussia.  The  plan  of  the  Landschaft  is 
so  simple  that  it  may  be  explained  to  and  understood  by  any 
person  of  average  intelligence.  Given  state  and  national  laws 
enacted  in  the  United  States  on  the  basis  of  the  European  safe- 
guarding method,  and  the  matter  becomes  quite  easy.  A  body 
of  citizens  in  a  certain  locality,  presumably  neighbors,  form  a 
Landschaft  operating  under  state  and  national  laws.  As  in  opera- 
tion in  Prussia  this  Landschaft  has  limited  functions,  restricted 
in  the  main  to  the  trusteeship  of  the  mortgages,  given  it  by  its 
members  on  their  lands.  On  these  mortgages  it  issues  the 
Landschaft  bonds   for  amounts   varying   from   one  half  to   two 


AGRICULTURAL   CREDIT  57 

thirds  of  the  appraised  vakie  of  the  land.  As  stated  to  the  Amer- 
ican commission  at  the  meeting  at  Dresden  by  Hofrat  Bach,  the 
"Landschaften  are  associations  of  borrowers,  in  contradistinction 
to  the  joint-stock  mortgage  banks,  which  are  associations  of 
lenders."' 

The  Landschaft  transacts  no  banking  business  whatever;  in 
fact,  it  transacts  no  business  except  that  above  stated — that  is, 
it  gives  the  borrower  a  bond  for  his  mortgage ;  the  borrower  then 
proceeds  to  sell  the  bond  in  the  open  market  and  puts  the  money 
in  his  pocket,  and  that  is  the  end  of  the  money  so  far  as  the 
Landschaft  is  concerned.  All  it  asks  of  the  borrower  is  to  hand 
in  the  interest  and  amortization  on  his  bond  until  the  debt  is 
extinguished.  If  he  does  not  do  this,  the  Landschaft  takes 
possession  of  his  land,  has  it  sold  to  the  highest  bidder,  and  re- 
turns to  the  borrower  any  balance  left  over  and  above  the  amount 
for  which  he  was  given  a  bond,  and  the  costs.  The  Landschaft 
can  do  this  in  Prussia  without  any  recourse  to  a  law^suit.  Sub- 
stantially, the  Landschaft  in  all  this  has  the  power  of  final 
decision  vested  in  a  supreme  court.  If  no  such  power  can  be 
granted,  then  it  would  be  unsafe  to  have  a  Landschaft  in  the 
United  States ;  in  fact,  we  could  not  have  it,  for  the  purpose  of 
the  Landschaft  is  to  secure  long-time  loans  with  amortization 
at  3,  3^,  and  4  per  cent,  and  this  interest  rate  would  double 
or  treble  itself  as  soon  as  doubt  as  to  the  validity  of  titles  and 
other  questions  between  borrower  and  lender  would  be  con- 
sidered admissible.  The  Landschaft  in  Prussia  has  no  such  ques- 
tions to  contend  with.  The  Landschaft  directors  foreclose  with- 
out recourse  to  lawsuits.     Their  decision  is  final. 

Safeguarding  Features 

And  the  question  may  be  asked :  Would  not  such  a  Landschaft 
system  be  likely  to  lend  itself  to  failure  through  dishonesty  or 
incompetency  on  the  part  of  the  directors  ?  It  certainly  would 
if  it  were  not  for  the  safeguard  furnished  by  state  and  national 
laws.  In  Prussia  this  safeguard  is  the  sine  qua  non  of  the  Land- 
schaft. One  of  the  members  of  the  board  of  directors  of  the 
Landschaft  is  appointed  by  the  King — appointed  for  life — while 
the  other  members  are  in  substance  semigovernment  officials 
so  long  as  they  hold  the  position  of  directors  of  the  Landschaft. 
It  is  the  safeguarding,  the  rigorous  safeguarding,  of  this  system 


58  SELECTED   ARTICLES 

by  the  Prussian  government  that  gives  the  bonds  the  high  value 
they  have  in  the  open  market  and  which  makes  them  saleable 
at  the  low  rate  of  interest  which  is  paid  on  them.  Remove  this 
government  safeguard  and  the  bonds  will  slump  in  price  at  once, 
and  the  interest  would  have  to  be  doubled  or  trebled  before 
they  would  sell.  In  fact,  such  bonds  would  not  sell  at  all,  for  a 
bond  in  the  open  market,  subject  to  the  law  of  a  certain  district, 
administered  in  that  district,  may  only  have  a  limited  and  local 
value.  Such  a  bond  would  not  be  liquid ;  it  can  not  be  liquid ;  and 
to  attempt  to  make  it  so  would  luit  invite  ruin.  The  need  for 
national  government  safeguard  is  clearly  indicated  in  the  state- 
ment made  to  the  American  Commission  at  the  Dresden  hearing 
(June  22,  1913),  which,  in  speaking  of  co-operative  credit  so- 
cieties before  national  law  was  enacted  for  their  safeguarding, 
says: 

All  these  societies  did  a  good  business  .  .  .  until  a  crash  came  in 
1873  and  swept  away  the  Vorschuss  Verein  with  it — many  were  rendered 
bankrupt,  others  forced  to  go  into  liquidation.  ...  In  this  way  the 
further  life  of  such  societies  practically  ceased  in  Saxony  for  the  next 
20  years  or  so;  but  in  1889  came  the  great  German  Imperial  law,  which 
is  to  be  thanked  for  the  splendid  revival  of  cooperative  societies  in 
Germany. 

This  law  provides  for  the  rigorous  government  supervision  of 
all  co-operative  credit  societies. 

So,  then,  we  must  either  have  the  Landschaft  system  safe- 
guarded in  the  United  States  by  state  and  by  national  law  and 
administered  as  rigorously  as  in  Prussia,  or  we  can  have  no 
Landschaft  system  operating  safely  in  the  United  States. 

In  my  opinion  it  will  be  found  just  as  possible  to  have  the 
Landschaft  system  in  the  United  States  as  it  is  to  have  it  in  Ger- 
many; for  what  will  be  asked  of  the  United  States?  Will  it  be 
to  lend  the  farmers  money?  No.  Will  it  be  that  the  Govern- 
ment of  the  LTnited  States  should  guarantee  the  bonds?  No. 
What  then?  The  United  States  will  simply  be  asked  to  act  as 
umpire  between  borrower  and  lender.  The  United  States  is  to 
see  that  both  parties  adhere  strictly  to  the  terms  of  the  contract. 
That  is  all.  And  it  may  be  that  some  simple  mode  of  procedure 
can  be  put  in  operation  toward  this  end  without  at  all  infringing 
upon  the  Constitution.  Perhaps  this  can  be  done  through  some 
such  body  as  the  Interstate  Commerce  Commission,  or  by  some 


AGRICULTURAL   CREDIT  59 

other  body  created  for  that  purpose.  Such  body  should  be 
granted  the  right  of  dealing  with  the  bonds  issued  in  one  state 
and  bought  and  held  by  citizens  of  various  states  of  the  United 
States :  clearly  an  inter-state  transaction. 

I  have  before  me  the  financial  supplement  of  the  Vossische 
Zeitung  of  Berlin  (June  13),  giving  stock-exchange  quotations 
Ample  space  is  given  for  the  quotations  of  the  Landschaft  bonds. 
Let  us  compare  a  few  of  these  quotations  with  those  given  in 
the  same  paper  for  the  government  bonds  of  Germany  for  the 
same  day. 

The  Difference 

Quotations   of   German   Government   Bonds 

and  German  Landschaft  Bonds. 

Government  Landschaft 

bonds.  bonds. 

4   per   cent 96.00  100.00 

3l^7o  per  cent 84.80  96.00 

3  per  cent 74.80  80.50 

From  this  it  will  be  seen  that  the  Landschaft  bonds  stand 
higher  in  the  open  market  than  the  government  bonds  bearing 
the  same  rate  of  interest. 

The  Funds  of  Widows  and  Orphans 

And  now  another  point.  It  may  seem  that  the  Landschaft 
system  would  only  be  in  the  interest  of  the  American  farmer. 
This,  however,  is  but  one  phase  of  its  benefits,  and  by  no  means 
the  only  important  one.  There  is  another  section  of  the  com- 
munity of  equal  importance  to  the  farmers,  if  not  more  so,  to 
whom  the  benefits  of  such  a  system  would  go;  I  refer  to  the 
widows  and  orphans.  Above  all  investors  these  require  the 
greatest  security  and  are  at  the  same  time  by  themselves  the  least 
capable  of  investors.  Be  it  understood  that  making  a  safe  in- 
vestment of  money  is  a  perplexing  and  difficult  task  even  for  a 
man  well  posted  in  matters  of  finance.  How  much  the  more  so 
for  women,  who  have  had  very  limited,  perhaps  no  experience  at 
all  in  the  investment  of  money.  It  is  incumbent  upon  the  national 
government  to  aid  in  the  safeguarding  of  such  funds ;  for  if  it 
be  the  duty  of  government  to  be  policeman,  umpire,  in  the 
matter  of  equity  between  individuals,  in  the  preservation  of  the 
sanctity  of  contracts,  it  is  certainly  within  its  province  to  spread 


6o  SELECTED   ARTICLES 

its  sheltering  wings  over  the  otherwise  defenceless  funds  of  the 
widows  and  orphans. 

And  in  this  we  are  taught  a  lesson  from  the  example  of 
Germany,  The  Prussian  Landschaft  is  in  the  main  an  institution 
affording  a  safe  investment  for  the  funds  of  the  widows  and 
orphans.  The  safeguarding  of  the  Landschaft  by  the  Prussian 
government  renders  its  bonds  so  high  and  the  interest  so  low 
as  to  preclude  their  purchase  by  professional  money  lenders. 
Their  almost  absolute  security,  however,  renders  these  Land- 
schaft bonds  as  safe  an  investment,  and  with  less  chances  of 
fluctuation  on  the  open  market,  than  government  bonds,  as  illus- 
trated by  the  quotations  above  given.  They  are  therefore 
largely  bought  as  investments  for  the  funds  of  the  widows  and 
orphans,  and  consequently  are  so  securely  safeguarded  by  the 
Prussian  government. 

This  commendable  action  on  the  part  of  the  Prussian  gov- 
ernment reminds  me  of  an  historic  event  in  past  times  indicating 
the  high  humanitarian  reach  in  this  direction  attained  by  the 
people  of  Israel,  and  the  manly  acquiescence  in  this  exalted 
stand  by  the  great  Roman  general,  Pompey.  After  a  stubborn 
resistance  Pompey  succeeded  in  capturing  Jerusalem.  He  and 
his  soldiers,  in  an  endeavor  to  recoup  themselves  for  the  cost 
of  the  war,  entered  the  temple  for  the  purpose  of  spoil.  Going 
into  the  Holy  of  Holies,  where  he  expected  to  find  statues  of 
gods  and  goddesses,  images  of  silver  and  gold,  Pompey  found 
a  room  devoid  of  such  statues,  for  it  only  contained  a  great 
golden  candelabra  and  a  golden  table  for  the  shew  bread.  This 
was,  no  doubt,  a  disappointment  to  Pompey.  He  was,  however, 
told  that  there  were  ever  so  many  sacks  of  gold  and  silver  in 
the  vault  of  the  temple.  On  going  there  he  found  a  great  num- 
ber of  bags  of  gold  and  silver,  all  neatly  done  up  with  labels  on 
each.  "Why,"  he  asked  of  the  priest,  "did  you  not  tell  me  of 
this  treasure  before?"  "Because,"  said  the  priest,  "this  is  the 
sacred  treasure ;  these  bags  contain  the  funds  of  the  widows  and 
orphans  of  the  people  of  this  country.  We  therefore  consider 
them  more  sacred  than  the  offerings  to  God." 

Pompey  thought  for  a  while,  then  he  ordered  his  sol- 
diers to  wheel  about  and  march  out  and  never  touched  this 
treasure. 

And    this    lesson    is    sufficient.      The    American    government 


AGRICULTURAL   CREDIT  6i 

should  safeguard  the  funds  of  the  widows  and  orphans,  for  the 
American  people,  like  Israel  of  old,  is  a  righteous  nation. 

Nor  need  there  be  any  hesitation  at  taking  such  action  on  the 
ground  that  it  would  be  socialistic;  if  it  be  socialistic  at  all  it 
is  not  socialism  of  the  collectivist  order,  but  it  is  on  the  order 
of  Herbert  Spencer,  the  individualist.  Mr.  Spencer  laid  down 
the  proposition  that  the  chief  duty  of  government  is  that  of 
policeman,  umpire ;  that  its  chief  duty  is  to  arbitrate  between 
contracting  parties;  to  judge  between  them,  and  to  determine 
the  equities. 

And  what  duty  can  be  more  just  for  a  government  than 
arbitrament  in  the  case  of  such  a  body  as  the  Landschaft,  between 
the  farmer,  the  money  borrower,  on  the  one  hand,  and  the 
widows  and  orphans,  the  money  lenders,  on  the  other? 

In  corroboration  of  the  above,  I  wish  to  quote  the  opinion 
given  by  the  eminent  German  economist.  Prof.  Brodnitz,  of  the 
Halle  University.  In  reply  to  my  inquiry  (June  iS,  1913)  as  to 
what  guarantee  there  would  be  for  the  rigorous  supervision  of 
the  Landschaft,  he  replied : 

The  best  possible,  for  the  bonds  at  the  high  prices  at  which  they  sell 
and  at  the  low  interest  which  they  bring,  do  not  tempt  regular  money  lend- 
ers to  invest  in  them.  They  will  be  bought  up  mainly  as  investments  for 
the  funds  of  widows  and  orphans.  This  being  the  case  there  will  be 
every  reason  to  believe  that  these  investments  will  be  safeguarded  by  the 
government  with  such  caution  and  care  as  to  preclude  all  danger  of  fraud 
or  repudiation.  And  this  great  care  and  caution  would  give  these  bonds  a 
value  as  high  and  perhaps  render  them  steadier  even  than  government 
bonds,  especially  in  times  of  war  and  panic,  as  for  instance,  was  the  case 
in  1806  during  the  Napoleonic  wars,  when  the  Landschaft  bonds  were  high 
and  the  government  bonds  low. 

Keeping   Out   of  Debt 

Now  that  the  question  of  rural  credits  has  been  so  fully  placed 
before  the  American  people,  it  might  be  presumed  that  the 
American  farmer  has  been  thoroughly  awakened  to  its  impor- 
tance. This  is,  however,  far  from  being  the  case.  It  is  true  that 
the  farmers  of  America  are  learning  more  and  more  what  it 
all  means  as  time  goes  on,  but  at  the  present  writing  there  are 
quite  a  number  of  farmers  who  are  under  the  impression  that 
any  system  of  rural  credits  would  be  an  evil ;  they  are  under 
the  impression  that  the  best  thing  for  a  farmer  is  to  keep  out 


62  SELECTED   ARTICLES 

of  debt  of  any  kind.  These  farmers  fail  to  realize  the  fact  that 
for  a  business  man  or  farmer  to  follow  such  a  plan  literally 
would  require  a  surplus  bank  account  subject  to  call,  and  there- 
fore on  deposit  without  interest.  That  is,  quite  a  sum  of  money 
would  have  to  be  lying  by  idle,  doing  nothing,  and  such  a  mode 
of  procedure  is  not  a  gain  but  a  loss.  Moreover,  but  very  few 
farmers  have  such  surplus  money,  so  what  must  they  do?  They 
must  buy  all  they  need  and  pay  for  their  labor  and  raw  material 
on  time — on  long  time — and  this  means  buying  money  of  the 
storekeeper,  which  means  paying  the  highest  rate  in  the  world 
for  money  instead  of  the  lowest  rate  in  the  world.  It  further 
means  that  such  a  system  is  not  "keeping  out  of  debt"  at  all, 
but  keeping  in  debt,  and  at  the  highest  possible  cost  for  the  debt. 
In  fact,  the  American  farmer  has  yet  to  learn  the  simple  lesson 
taught  by  the  experience  of  the  American  merchant.  Say  40 
or  50  years  ago  the  American  merchant  could  not  obtain  money 
on  open  account  from  the  bank,  so  he  was  compelled  to  get  into 
debt  with  the  jobber,  and  it  was  then  that  the  jobber  took  from 
the  American  merchant  "all  that  the  traffic  would  bear" ;  that 
is,  the  jobber  farmed  the  merchant,  and  at  the  present  time  the^ 
storekeeper  farms  the  farmer,  and  if  the  farmer  would  only 
know  how  much  in  debt  this  supposed  "not-in-debt"  system 
places  him  it  would  open  his  eyes.  He  would  begin  to  see  that 
the  Landschaft  system,  instead  of  being  a  proposal  which  would 
put  the  American  farmer  into  debt,  is  just  the  very  system  which 
would  put  him  on  a  cash  basis. 

If  there  be  any  farmers  that  have  any  doubt  as  to  the  truth 
of  this  statement  they  can  readily  prove  it.  Let  them  go  through 
the  various  stores  in  the  cities  nearest  to  their  farms ;  let  them 
ask  each  of  the  merchants  to  tell  them  whether  they  utilize 
the  credit  to  which  their  assets  entitle  them  on  the  open  market, 
or  whether  they  refuse  to  make  such  use  of  these  assets;  and 
the  farmers  would  presently  find  that  there  is  perhaps  not  a 
single  merchant  of  good  standing  who  does  not  avail  himself 
of  such  credit.  The  only  ones  that  are  obliged  to  go  without 
it  are  those  who  have  a  reputation  for  dishonesty  or  incom- 
petency. 

Tlie  Need  for  the  Landschaft 
It  should  be  understood  that  the  financial  functions  of  a  busi- 


AGRICULTURAL   CREDIT  63 

ness  can  be  compared  to  the  human  breathing  apparatus.  The 
business  needs  a  winter  stock  which  must  be  bought  in  summer, 
and  a  summer  stock  which  must  be  bought  in  winter,  all  of 
which  requires  surplus  money,  more  money  than  the  mean  aver- 
age level.  There  is  periodic  expansion  and  contraction.  If  the 
merchant  has  money  lying  idle,  ready  for  use  whenever  he  needs 
a  dollar,  then  he  is  doing  business  in  a  clumsy  and  costly  way, 
and  quite  unnecessarily  if  he  have  a  good  standing.  His  assets, 
if  backed  by  good  character,  will  give  him  a  dollar  at  5  per 
cent  a  year.  With  this  dollar  in  hand  he  can  discount  his  bills 
at  the  rate  of  5  per  cent  a  day,  in  fact,  he  can  discount  and 
rediscount  with  the  same  dollar  many  times  over  that  day,  and 
return  the  dollar  to  the  bank  and  pay  interest  on  it  at  the  rate  of 
one  three-hundred-and-si.xty-fifth  of  5  per  cent  for  the  use  of 
that  dollar  for  that  day. 

But  the  most  profitable  use  of  the  money  that  the  farmer  can 
obtain  on  the  security  of  his  assets  will  be  had  in  using  it  col- 
lectively, through  co-operation,  through  a  corporation  formed  for 
that  purpose.  With  the  money  that  the  security  of  their  collective 
assets  would  give  them  the  co-operative  group  of  farmers,  or, 
if  you  please,  this  corporation  of  farmers,  could  then  perform 
all  the  functions  now  performed  by  the  city  commission  man  and 
by  the  trust.     In  fact,  the  farmers  could  be  their  own  trust. 

"But,"  say  some,  "what  need  is  there  for  the  Landschaft 
when  farmers  can  act  co-operatively  without  it?"  Yes,  that  is 
true ;  they  can  act  co-operatively  without  the  Landschaft,  with- 
out capital.  But  what  does  such  action  amount  to?  It  is  almost 
as  ineffectual  for  the  farmers  to  act  on  such  lines  as  it  would  be 
for  the  trusts,  were  they  deprived  of  their  capital  or  credit. 
Under  such  circumstances  the  trust  would  come  to  a  sudden 
standstill ;  it  would  cease  to  be  a  trust.  And,  in  the  final  analy- 
sis, the  farmer  without  capital  must  remain  subject  to  the  trusts 
who  have  the  capital.  The  fact  is,  the  collective  assets  of  the 
farmers  could  furnish  a  capital  very  much  greater  than  the 
greatest  of  the  trusts  could  command.  It  is  only  a  question  of 
placing  their  assets  in  an  available  liquid  form. 

The  Poii'cr  of  Capital 

In  1885  the  California  fruit  growers,  for  instance,  seeing  that 
they   were  in   the   hands   of  a   couple   of   trusts,   organized   co- 


64  SELECTED   ARTICLES 

operatively  to  fight  those  trusts.  The  California  trusts  were 
each  rated  at  a  million  dollars  and  over ;  the  California  fruit 
growers,  for  this  conflict,  only  had  a  few  hundred  dollars  to 
meet  current  expenses ;  and  as  a  result  of  the  fight  they  have  been 
waging  all  these  years,  the  couple  of  trusts  are  still  there,  doing 
business  at  the  old  stand,  with  almost  the  same  power  that  they 
had  in  1885.  It  was  the  trusts,  each  capitalized  for  a  million 
dollars  and  over,  that  did  the  work,  and  do  the  work.  It  was 
several  million  dollars  against  a  couple  of  hundred  dollars,  and 
the  couple  of  million  dollars  won  out  and  will  continue  to  win 
out  on  this  line  until  the  end  of  time. 

But  note  how  foolish  and  unnecessary  this  fight  is.  The 
trust  has  a  couple  of  million  dollars,  but  the  California  fruit 
growers  could  double  and  quadruple  that  couple  of  million  dol- 
lars several  times  over  if  they  were  to  place  their  assets  in 
available  liquid  form — in  a  form  of  which  the  Landschaft  system 
would  permit.  And  so  with  the  farmers  everywhere,  they  could 
become  the  distributors  of  their  own  products  through  the 
medium  of  the  Landschaft  system. 

The  Landschaft  would  be  the  mode  for  getting  the  money ; 
that  is  all  that  the  Landschaft  could  do.  The  farmers  could 
then  form  another  co-operative  association,  another  corpora- 
tion, their  own  co-operative  bank,  in  which  they  could  deposit 
the  money  obtained  by  the  sale  of  the  Landschaft  bonds.  This 
bank  could,  in  turn,  first  give  the  farmers  the  open  account, 
which  would  enable  them  to  do  business  for  cash ;  it  could 
secondly  furnish  the  money  for  the  co-operative  distribution  of 
the  products  of  the  farm.  All  this  would  make  it  possible  for 
the  farmers  to  form  the  third  and  last  co-operative  group  or 
corporation  for  the  collective  purchase  of  requirements  and  the 
collective  distribution  of  their  products.  There  would  thus  be 
three  distinct  co-operative  groups,  three  corporations.  First,  the 
Landschaft ;  second,  the  co-operative  bank ;  third,  the  co-opera- 
tive purchasing  and  distributing  association.  The  safeguarding 
proposal  by  the  state  and  nation  would  only  refer  to  the  Land- 
schaft and  not  to  the  other  two. 


AGRICULTURAL   CREDIT  65 

World's  Work.     26:623-5.     October,   1913. 
Low-Rate,  Long-Time  Money  for  the  Farms.     Ralph  W.  Moss. 

The  farmers  of  Europe  are  more  highly  organized  to  secure 
financial  credit  than  are  the  farmers  of  the  United  States,  and 
they  get  money  at  lower  rates  and  for  longer  terms.  The 
various  governments  have  given  cordial  recognition  to  the  farm- 
ers' organizations  and  in  many  ways  have  extended  aid  to  the 
movement.  As  the  cooperative  credit  associations  have  already 
spread  over  the  Continent  and  are  now  being  organized  in  Ire- 
land, we  may  safely  accept  the  universal  testimony  that  these 
organizations  sprung  from  the  necessity  for  a  better  system  of 
rural  credit  than  the  commercial  banks  offered. 

Farm  credit  differs  essentially  from  commercial  credit.  The 
period  between  the  loan  and  repayment  must  be  longer.  The 
farmer  cannot  make  his  turn-over  as  quickly  as  can  the  mer- 
chant. In  rural  credit  that  properly  serves  productive  agricul- 
ture the  repayment  of  a  loan  should  not  be  demanded  until  the 
maturity  of  the  crop  in  which  the  borrowed  capital  is  invested. 

The  essential  problem  in  establishing  such  a  system  is  to  be 
found  in  the  replacing  of  the  money  which  is  lent  for  these  con- 
siderable periods.  Of  course  a  banking  association  must  neces- 
sarily accept  deposits  in  order  to  secure  funds.  This  is  true  of 
the  cooperative  loan  associations  of  Europe,  and  90  per  cent 
of  the  money  which  they  lend  to  their  members  is  placed  in  their 
care  by  depositors.  These  deposits  are  accepted  in  the  same  way 
that  similar  transactions  are  conducted  by  American  bankers. 
They  can  be  withdrawn  in  the  same  manner  that  deposits  can 
be  withdrawn  from  American  banks.  When  they  lend  this  money 
to  farmers  they  must  have  a  way  of  replacing  it  if  their  de- 
positors wish  to  withdraw.  The  European  loan  associations 
replace  their  capital  by  indorsing  the  farmers'  notes  and  by 
rediscounting  these  notes  to  meet  the  demands  of  their  depositors 
without  compelling  the  repayment  of  loans  made  to  their  mem- 
bers. In  this  respect,  the  banking  laws  of  European  countries 
differ  from  our  banking  laws.  For  example,  the  Bank  of  France 
has  the  legal  right  to  issue  bank  notes  based  upon  commercial 
paper  which  bears  three  indorsements.  In  order  to  meet  this 
legal  requirement  the  farmers  organized  the  small  association 
composed  of  neighboring  farmers.     These  small  units  were  then 


66  SELECTED   ARTICLES 

grouped  around  a  regional  or  central  bank.  The  system  was  now 
complete  because  a  chain  was  constructed  to  join  the  farm,  with 
the  government  bank.  A  farmer  presents  his  promissory  note 
to  his  association  for  discount.  His  neighbor  acts  as  his  se- 
curity by  indorsing  this  note.  This  is  the  first  indorsement.  The 
loan  association  then  adds  its  indorsement  and  presents  the 
note  to  the  regional  bank.  This  guarantee  of  the  association 
is  the  second  indorsement.  It  now  only  remains  for  the  regional 
bank  to  add  its  indorsement  and  forward  it  to  the  Bank  of 
France,  which  issues  bank  notes  for  it.  The  local  loan  associa- 
tion discounts  the  farmer's  note,  the  regional  bank  rediscounts 
it,  and  the  Bank  of  France  rediscounts  it  again  in  the  form  of 
an  issue  of  bank  notes.  The  farmer  gets  his  money  at  low  rates 
for  long  periods  and  yet  the  ultimate  lender,  the  Bank  of  France, 
takes  little  risk,  being  protected  by  an  original  borrower  and  two 
indorsements.  In  this  way,  also,  the  depositor  in  an  association 
is  enabled  to  receive  his  money  from  the  association  before  the 
loan  is  repaid  by  the  farmer.  In  substance,  this  element  is  em- 
bodied in  every  system  of  rural  credit  in  Europe.  It  is  evi- 
dent that  it  is  the  privilege  of  rediscount  rather  than  the  co- 
operative organization  which  is  the  foundation  stone  of  this 
credit  system.  Cooperation  is  the  method  by  which  the  special 
provisions  of  law  are  being   utilized  for  farm  purposes. 

As  our  banking  laws  have  not  permitted  the  issue  of  cur- 
rency against  farmers'  notes,  no  matter  how  many  times  indorsed, 
there  will  have  to  be  modifications  if  we  are  to  organize  effective 
systems  of  rural  credits  after  European  models.  But  if  these 
changes  are  made  our  existing  banks  can  utilize  these  rediscount 
privileges  as  effectively  as  can  cooperative  associations.  There 
are  as  many  chartered  banks  in  the  United  States  per  thousand 
population  as  there  are  in  Germany,  with  its  cooperative  asso- 
ciations. At  present,  neither  chartered  banks  nor  cooperative 
associations  in  the  United  States  can  lend  deposited  funds  and 
meet  the  demands  for  the  return  of  these  funds  from  any  other 
source  than  repayment  by  the  borrower.  It  is  useless  to  argue 
whether  banks  or  cooperative  organizations  are  best  adapted 
to  advance  credit  to  farmers  until  it  is  made  possible  for  such 
business  to  be  transacted  successfully.  The  first  requisite,  and 
it  is  one  on  which  all  persons  can  unite,  is  a  change  in  our 
banking  system  which  will  permit  rediscounting  of  solvent  loans. 


AGRICULTURAL   CREDIT  67 

This  power  of  rediscount  should  be  placed  under  governmental 
control.  I  heartily  indorse  that  portion  of  the  pending  currency 
bill  which  places  the  Secretary  of  Agriculture  on  the  Federal 
Reserve  Board.  It  is  a  great  step  forward  in  currency  reform 
from  the  standpoint  of  agricultural  credit  and  agricultural 
equality  in  the  money  markets  of  tlie  United  States. 

Conceding  that  the  proposed  revision  of  our  currency  laws 
will  give  every  proper  facility  for  the  organization  of  agricul- 
tural credit,  it  will  become  a  question  for  our  bankers  to  decide 
whether  they  will  offer  tliis  credit  or,  by  refusal,  compel  the 
organization  of  cooperative  credit  associations.  It  is  abundantly 
proved  that  such  organizations  are  safe  and  practical.  It  is 
simply  a  matter  of  organizing  after  models  which  have  lieen 
proved  by  years   of   successful    experience. 

A  modern  system  of  land  mortgage  credit  is  of  greater  im- 
portance to  our  nation  than  an  improved  system  of  personal 
credits.  Our  farmers  are  facing  an  era  of  extraordinary  expend- 
itures if  they  keep  abreast  of  the  times.  The  depleted  fertility 
of  our  farms  must  be  restored ;  better  roads  are  to  be  constructed ; 
the  quality  of  our  live  stock  is  to  be  improved,  and  their  numbers 
greatly  increased;  better  methods  of  tillage  are  to  be  adopted; 
higher  standards  of  agricultural  education  are  to  be  accepted; 
and,  finally,  the  young  man  is  to  be  encouraged  to  acquire  owner- 
ship of  the  land  he  cultivates  so  as  to  avert  the  growing  menace 
of  landlordism.  These  expenditures  in  the  aggregate  will  amount 
to  a  stupendous  sum  and  their  repayment  should  be  distributed 
over  a  long  period  of  'time.  The  rate  of  interest  should  be  re- 
'duced  to  the  level  of  other  financial  undertakings  of  like  magni- 
tude. In  Europe,  money  is  available  for  such  purposes  at  nearly 
as  low  rates  as  the  governments  can  borrow  for  national  purposes. 
This  is  as  it  should  be.  In  the  truest  sense,  the  rebuilding  of 
agriculture  along  permanent  lines  is  a  national  expenditure  as 
vital  to  the  future  supremacy  of  our  nation  as  is  the  maintenance 
of  our  army  and  navy. 

European  experience  has  conclusively  demonstrated  that  land 
mortgage  bonds  can  be  sold  in  large  volume  at  low  rates  of 
interest.  The  proceeds  of  these  bonds  can  be  lent  to  farmers  on 
long-time  payments  at  a  low  rate  of  interest,  with  a  small  pay- 
ment on  the  principal  which  ultimately  will  wipe  out  the  debt. 
In  France,  the  annual  charge  for  such  money,  including  all  prin- 


68  SELECTED   ARTICLES 

cipal,  interest,  and  commission  charges,  is  less  than  5  per  cent; 
perhaps  this  rate  will  be  a  fair  average  for  the  Continent.  The 
government  lends  money  to  farmers  for  special  purposes  at  a 
lower  rate,  but  I  am  speaking  of  the  ordinary  commercial  rate 
for  the  repayment  of  a  mortgage  loan.  I  know  that  it  is  difficult 
for  an  American  farmer  to  understand  that  a  loan  will  be  repaid 
in  full  by  annual  payments  which  are  lower  than  our  present 
interest  charges  alone ;  but  it  is  a  fact  that  can  easily  be  demon- 
strated. 

The  usual  method  of  negotiating  these  long-time  mortgage 
credits  is  by  fixing  a  rate  of  repayment  which  cannot  be  changed 
during  the  life  of  the  loan.  This  rate  of  payment  includes  an 
allowance  for  current  interest  due  on  the  loan,  an  amount  to  be 
kept  by  the  bank  for  administration,  and  a  certain  sum  to  be 
credited  on  the  principal.  In  the  language  of  the  bank,  these 
are  called  "interest,  administration,  and  amortization." 

The  standard  length  of  time  in  Europe  for  a  long-time  loan 
is  54  years.  For  such  a  loan  at  the  present  time  the  rate  is  4.85 
per  cent,  divided  as  follows :  interest,  4  per  cent,  administration, 
•35  per  cent,  and  amortization  (payment  on  principal)  .50  per 
cent.  This  rate  will  pay  both  principal  and  interest  and  repay 
all  charges  due  to  the  bank  in  54  years.  As  this  will  seem  almost 
incredible  to  some  students,  I  will  give  a  concrete  illustration  of 
how  it  works.  It  does  not  depend  upon  compound  interest,  but 
upon  the  fact  that  though  the  rate  of  yearly  payment  remains 
the  same,  the  charge  for  interest  and  administration  is  constantly 
decreasing  because  they  are  computed  on  the  principal  sum  which 
is  constantly  being  repaid.  Therefore,  the  proportion  which  is 
applied  toward  the  repayment  of  the  principal  is  always  increas- 
ing. 

For  illustration:  If  the  debt  were  $1,000,  the  debtor  will  pay 
$24.25  every  six  months.  Of  the  first  payment,  $20  will  go  for 
interest,  1.75  belongs  to  the  bank,  and  $2.50  is  applied  to  the 
repayment  of  the  principal.  When  the  debt  is  half  discharged, 
however,  this  distribution  will  be  greatly  changed.  The  borrower 
will  pay  $24.25  as  usual ;  of  this  amount,  only  $10  will  go  for 
interest,  88  cents  will  be  retained  by  the  bank,  while  $13.37  will 
be  applied  to  the  discharge  of  the  principal.  The  final  payment 
will  be  almost  wholly  devoted  to  the  payment  of  principal  as  the 
first  one  went  largely  to  the  payment  of  interest.     In  this  way, 


AGRICULTURAL   CREDIT  69 

one  half  of  i  per  cent  will  repay  the  principal  in  54  years,  pro- 
vided a  constant  payment  is  maintained  on  the  principal  for 
interest  during  the  entire  period.  The  manifest  advantages  are 
so  great  that  we  should  press  this  matter  most  vigorously. 

This  system  of  making  loans  for  agricultural  purposes  was 
first  undertaken  by  cooperative  mortgage  associations  in  Ger- 
many. The  joint  stock  banks,  representing  private  capital,  ac- 
cepted this  plan  of  transacting  business  as  soon  as  it  was  dem- 
onstrated that  farmers  by  cooperation  could  secure  capital  in 
the  world's  markets  at  fair  terms.  Both  systems  have  been  in 
successful  operation  for  many  years.  The  joint  stock  banks 
have  found  land  mortgage  business  profitable  and  safe  from  a 
banking  standpoint.  Here,  again,  is  a  question  of  policy  pre- 
sented to  American  bankers.  Land  mortgage  bonds  secured 
by  mortgages  payable  on  the  amortization  principle  will  be 
introduced  into  the  United  States.  The  future  development  of 
our  nation  imperatively  demands  it.  There  are  two  models,  each 
of  which  has  been  proved  by  years  of  successful  experience. 
One  is  a  bond  issued  against  a  first  mortgage  on  real  estate  and 
guaranteed  by  an  association  of  farmers  who  are  the  borrowers — 
the  cooperative  plan;  the  other  is  a  bond  issued  on  like  security 
and  guaranteed  by  a  joint  stock  bank  which  is  an  association  of 
lenders.  Unless  our  existing  banks  adopt  the  latter  method  of 
financing  the  farmers  of  America,  cooperative  organizations 
among  the  borrowers  will  inevitably  grow  up  because  the  prin- 
ciple of  self-help  will  compel  it. 

I  have  discussed  only  the  main  principles  involved.  The  ques- 
tion of  personal  credit  falls  within  the  domain  of  federal  legisla- 
tion while  that  of  land  mortgage  goes  more  directly  to  the  state 
legislatures.  And  there  will  have  to  be  many  changes  in  many 
of  our  state  laws  before  that  business  will  be  on  a  satisfactory 
basis. 


Nebraska  Farmers'  Congress.     Official  Year  Book,  1914. 

Can    European   Rural    Credit    Systems    Be    Made    Applicable   to 
the  American  Farmer?     Gordon  Jones. 

European  rural  credit  systems  follow  the  natural  division  into 
short-term  personal  credit  societies  and  long-term  land  mortgage 


70  SELECTED   ARTICLES 

associations.  The  organization  of  cooperative  societies  for  short- 
term  credit  was  forced  upon  the  farmers  because  of  the  lack  of 
other  banking  facilities.  Capital  had  not  sought  investment  in 
country  bank  stock.  Therefore  the  farmers  had  no  place  of 
deposit  or  obtaining  credit  for  their  temporary  needs,  and  the 
organization  of  the  cooperative  credit  society  was  the  result. 
In  lieu  of  capital  stock,  credit  is  pledged — sometimes  with 
limited  liability  of  its  members,  but  more  often  unlimited.  That 
is,  when  a  farmer  becomes  a  member  of  a  cooperative  credit 
society  (or  bank  as  it  is  called  in  some  countries,  though  in  others 
the  use  of  the  word  "bank"  by  them  is  prohibited)  he  pledges 
his  entire  worth  for  the  debts  of  the  society  or  bank 

Short-Term  Credit  Syste)n 

In  Germany  these  societies  have  reached  their  highest  state 
of  development.  Throughout  that  entire  Empire  the  number  of 
regular  banks,  including  these  cooperative  short-term  credit 
societies,  equals  one  for  each  4,000  population,  or  one  for  about 
each  800  families.  This  is  practically  the  same  ratio  of  banking 
institutions  to  the  population  that  exists  in  the  United  States. 
It  is  therefore  obvious  that  this  form  of  rural  cooperative  bank- 
ing occupies  the  same  field  in  that  country  that  is  occupied  by  the 
country  banks  in  this.  It  is  not  a  difficult  task  to  determine  the 
holdings  and  the  financial  standing  of  a  borrower,  not  only 
because  of  the  intimate  knowledge  of  the  conditions  of  every 
farmer  by  every  other  farmer,  but  because  of  the  simple  methods 
of  property  assessment  and  title  registration.  Property  is  as- 
sessed at  full  value,  which  valuation  is  generally  used  as  an 
appraisement  or  for  a  basis  of  credit. 

These  short-term  credit  societies  throughout  continental  Eu- 
rope are  generally  federated,  and  own  and  operate  a  central 
society  in  some  large  commercial  center.  There  are  hundreds  and 
sometimes  several  thousand  thus  federated.  There  are  no  estab- 
lished rules  governing  these  individual  societies,  each  being  left 
free  to  make  its  own  by-laws,  by  them  termed  "constitution," 
for  the  conduct  and  regulation  of  its  own  business. 

The  central  does  reserve  the  right  of  supervision  and  exam- 
ination as  a  creditor,  for  these  local  societies  obtain  needed  finan- 
cial assistance  through  the  central ;  that  is,  the  central  extends 
loans  to  or  rediscounts  for  the  local  societies.     When  its  own 


AGRICULTURAL    CREDIT  71 

resources  are  exhausted  it  in  turn  obtains  help  either  from  the 
banks  of  issue  or  some  large  commercial  bank.  The  local  soci- 
eties deposit  their  unemployed  funds  with  the  central.  When 
demand  is  light  in  one  section  and  strong  in  another  the  central 
thus  serves  as  an  intermediary  between  the  locals  in  equalizing 
the  condition. 

The  central  society  has  a  capital,  furnished  by  the  local 
federated  societies  in  proportion  to  their  own  membership,  and 
is  thus  owned  by  them,  though  they  exercise  little  or  no  super- 
vision or  control  over  the  central.  This  has  proven  a  weakness 
of  the  system  as  I  shall  pr-ove.  The  central  is  meant  to  be  the 
servant  and  not  the  master  of  the  small  societies,  and  is  there- 
fore opposed  to  the  branch  banking  system  where  the  central 
bank  owns  and  controls  the  branches.  These  local  societies 
assume  no  liability  for  the  debts  of  the  central  or  of  one  another, 
though  the  individual  members  may  have  unlimited  liability  for 
the  debts  of  their  own  local  society.  This  unlimited  liability,  it 
should  be  kept  in  mind,  is  in  lieu  of  a  paid-up  capital  stock. 

European  cooperative  credit  societies  operate  without  direct 
profit  to  their  members,  their  object  being  to  render  financial 
assistance  and  advice  so  that  the  members  may  make  their  profits 
upon  their  individual  efforts.  In  some  cases  the  government  has 
made  liberal  advances  to  such  societies  upon  a  nominal  or  no 
interest  charge.  When  they  are  thus  fostered,  the  government 
exercises  certain  control  and  supervision  over  them.  This  is 
objected  to  by  others,  who  operate  without  government  assist- 
ance of  any  kind.  Such  aid  as  involves  governmental  control 
over  their  operations  is  objected  to  by  some,  as  tending  to  retard 
the  initiative  of  the  people.  We  found  many  that  had  originally 
accepted  of  government  aid,  had  given  up  such  aid  and  were  now 
on  their  own  initiative  and  responsibility,  preferring  this  freedom 
of  operation  to  the  red  tape  and  unnecessary  restrictions  that 
usually  follow  where  a  government  undertakes  the  control  of 
private  operations — mind,  I  say  control,  not  regulation.  I  ara  a 
firm  believer  in  government  regulation,  but  not  control  over 
private  capital  or  activities. 

Losses  are  sometimes  sustained  by  these  rural  short-term 
credit  societies,  just  as  losses  are  sustained  by  our  country  banks. 
When  losses  occur  they  are  met  out  of  the  small  profits,  if  suffi- 
cient; if  not  sufficient,  by  an  assessment;  if  too  disastrous,  the 


^2  SELECTED   ARTICLES 

society  would  be  forced  to  liquidate,  and  general  distress  would 
follow  in  paying  up  security  debts  and  meeting  the  unlimited 
liability  for  all  obligations  of  the  society. 

There  are  no  legal  requirements  upon  banks  or  credit  societies 
for  a  cash  reserve  throughout  Europe  so  far  as  ascertained ;  ex- 
cepting the  gold  reserve  required  of  the  banks  of  issue.  There- 
fore all  European  banks,  the  large  commercial  institutions  as 
well  as  the  small  credit  societies,  can  be  of  the  greatest  possible 
benefit  to  the  people,  for  they  are  not  required  to  lock  up  a  large 
part  of  the  country's  circulating  medium  in  a  useless,  so-called, 
reserve,  which  is  not  allowed  to  be  used  to  even  meet  the  con- 
tingency for  which  a  reserve  is  supposed  to  be  held.  While 
seeking  for  methods  of  improving  our  financial  system  and  for 
lowering  interest  rates,  it  would  be  well  for  our  lawmakers  to 
give  serious  consideration  to  the  abolition  of  useless  reserve 
requirements,  provided  a  sufficiently  strong  credit  expansion  and 
note-issuing  power  is  created.  So  long  as  our  banks  are  required 
to  keep  a  considerable  portion  of  their  deposits  in  idle  and 
useless  reserves,  interest  rates  will  remain  proportionately  higher 
than  necessary.  There  are  hundreds  of  millions  of  dollars  of 
the  country's  circulating  medium  thus  uselessly  locked  up. 

In  addition  to  operating  without  reserve  requirements,  the 
European  rural  cooperative  credit  societies  are  organized,  as 
before  stated,  without  capital  and  without  the  view  of  profit. 
The  loaning  rate  is  regulated  just  to  meet  the  expenses  of  oper- 
ation. Such  expenses  are  held  down  to  the  minimum,  with  little 
or  no  taxes  to  pay.  The  cashier  draws  but  a  nominal  salary, 
usually  getting  his  livelihood  largely  from  other  sources,  and 
holds  his  position  as  a  secondary  matter.  The  president  and 
directors  serve  without  compensation.  Unless  there  is  consider- 
able volume  of  business  no  bookkeeper  is  employed.  Bookkeep- 
ing is  simple,  as  checking  is  not  done  as  it  is  done  with  our 
country  banks.  Such  societies  seldom  cash  or  receive  for  deposit 
checks  or  drafts  on  other  banks.  Doors  of  the  small  societies 
are  opened  on  stated  days — once  each  week  or  sometimes  semi- 
monthly. The  furniture  and  fixtures  account  is  nominal,  as 
usually  a  table,  desk,  and  chairs  constitute  the  entire  equipment — 
often  not  even  a  safe.  Sometimes  a  room  in  the  home  of  the 
cashier  is  used  as  its  place  of  business.  I  doubt  if  our  American 
farmer  would  be  satisfied  with   this   sort  of   banking  facilities. 


AGRICULTURAL   CREDIT  73 

and  at  the  same  time  render  himself  Hable  for  all  the  deposits 
and  debts  of  the  bank,  in  order  to  be  able  to  obtain  his  money 
at  a  less  rate  of  interest;  or  at  least  I  doubt  if  the  more  respon- 
sible farmer,  who  would  give  strength  and  standing  to  such  a 
bank,  would  be. 

All  these  facts  should  be  considered  in  comparing  interest 
rates  paid  by  European  farmers  with  those  paid  by  the  American 
farmer  for  short-term  personal  credit. 

Undoubtedly  the  fact  has  already  been  noted  that  European 
cooperative  rural  credit  societies  are  associations  of  borrowers. 
This  is  one  of  the  most  marked  distinctions  between  the  Eu- 
ropean and  American  systems,  for  in  our  country,  banks  are 
associations  of  lenders.  Our  national  and  state  laws  either 
restrict  or  prohibit  bank  owners  from  borrowing  from  their  own 
bank. 

Our  investigation  proved,  beyond  doubt,  that  in  order  to  keep 
pace  with  European  countries  we  need  in  the  United  States  a 
change  in  our  present  financial  system  that  will  permit  our 
banks  to  be  more  liberal  with  their  borrowing  customers.  I  do 
not  mean  to  be  more  liberal  in  the  acceptance  of  security,  but  to 
be  enabled  to  be  more  liberal  in  credit  expansion  for  the  purpose 
of  facilitating  the  maturing  and  marketing  of  crops.  Our 
country  banks  are  mostly  owned  by  the  farmers  themselves,  and 
as  we  have  about  the  same  ratio  to  the  population  that  exists  in 
the  country  where  cooperative  societies  are  most  highly  devel- 
oped, I  can  not  see  the  necessity  for  establishing  an  entirely  new 
system  of  rural  banking  for  the  United  States  for  the  purpose 
of  rendering  short-term  personal  credit  to  our  farmers.  Our 
present  banking  laws,  if  modified  to  enable  the  national  and  state 
banking  systems  already  established  to  respond  to  the  require- 
ments of  the  farmer,  in  a  manner  I  shall  endeavor  to  point  out, 
would  amply  suffice. 

Our  crying  need  is  the  creation  of  an  elastic  currency  and  a 
safe  credit  expansion  system.  It  is  to  be  hoped  that  in  the 
enactment  of  our  new  financial  system  the  peculiar  needs  of  the 
farmer  for  the  maturing  and  marketing  of  his  crops  will  be  met. 

It  should  be  kept  in  mind  that  "the  maturing  and  marketing 
of  crops"  contemplates  as  well  the  maturing  and  marketing  of 
live  stock  and  its  by-products,  for  the  reason  that  a  large  part 
of  our  crops  is  thus   marketed.     The  bankers   of  this   country 


74  SELECTED   ARTICLES 

have  realized  for  j'ears  the  inadequacy  of  our  present  financial 
system.  Contrary  to  the  operations  of  the  banking  systems  of 
European  countries,  we  have  a  fixed  or  static  circulating  medium, 
and  no  method  of  increasing  our  circulation  or  of  obtaining 
credit  in  times  of  greatest  need.  It  is  almost  inconceivable  that 
a  great  nation  like  our  own  should  have  for  such  a  length  of 
time  left  its  agricultural,  commercial,  and  industrial  interests 
so  poorly  provided  for.  This  lesson  has  been  impressed  upon 
our  minds  time  and  again  in  the  repeated  needs  for  an  increased 
money  supplj^  both  in  the  moving  of  crops  and  in  the  demands 
of  an  excited  banking  public. 

The  pending  bank  and  currency  bill,  if  enacted  in  its  present 
form,  will  fall  short  of  the  needs  of  our  coimtry  banking  and 
agricultural  interests.  From  the  standpoint  of  the  farmer  and 
stockman  a  serious  objection  to  the  pending  measure  is  the 
restriction  placed  upon  the  time  limit  of  paper  to  be  accepted  by 
the  proposed  federal  bank  for  rediscount.  It  is  easily  under- 
stood why  it  should  be  necessary  to  require  reasonably  short 
time  and  perfectly  liquid  paper ;  but  I  see  no  reason  sufficiently 
strong  to  restrict  the  maturity  so  that  little  of  that  held  by  our 
country  banks  would  be  available,  and  especially  that  made  by 
our  producers,  who  require  a  longer  time  to  mature  and  prepare 
their  products  for  market. 

A  fixed  rule  is  not  applicable  over  the  entire  United  States 
for  the  reason  that  conditions  and  requirements  vary  greatly 
in  the  different  sections.  In  some  sections,  at  certain  seasons 
of  the  year,  the  time  limit  might  suffice,  while  in  other  sections, 
at  the  same  season,  the  time  limit  would  not  suffice.  The  time 
limit  named,  however,  would  always  be  adequate  for  the  dis- 
tributor or  the  middleman.  The  contention  has  been  for  years 
that  the  American  producer  is  handicapped  and  that  the  middle- 
man is  absorbing  too  much  of  the  price  paid  by  the  consumer. 
Why  make  it  still  easier  for  the  middleman  to  finance  himself 
without  at  the  same  time  giving  the  producer  equal  facilities? 
It  should  be  kept  in  mind  there  exist  no  such  restrictions  upon 
the  producers'  paper  in  European  countries,  and  it  is  incon- 
ceivable that  our  lawmakers  will  write  upon  our  statutes,  in  the 
present-day  light,  a  new  banking  code  that  will  not  give  our 
farming  industry  an  equal  show  with  other  industries  needing 
credit   facilities. 


AGRICULTURAL   CREDIT  75 

I.ojig-Tcriu  Credit  Systoii 

Passing-  from  the  short-term  credit  societies  as  organized  and 
operated  in  European  countries,  we  have  now  to  consider  the 
long-term  mortgage  associations  as  another  phase  of  the  sub- 
ject under  discussion.  Here  we  have  much  to  learn  from  Euro- 
pean methods.  It  is  a  recognized  fact  that,  in  our  country, 
financiers  have  devoted  themselves  more  to  the  financing  of 
railroads,  utility  corporations,  and  urban  building  than  they 
have  to  financing  the  farmer. 

We  should  keep  in  mind,  in  discussing  this  subject,  the  rel- 
ative importance  of  the  city  and  the  country.  Destroy  the  city 
and  the  country  surrounding  it  would  soon  rebuild  that  city ; 
but  destroy  tlie  countrj'  surrounding  a  city  and  the  city  could 
not  rebuild  the  country,  but  of  itself  could  not  long  survive. 
The  more  prosperous  the  country,  the  greater  and  more  prosper- 
ous the  city,  and  as  the  city  becomes  greater  and  more  prosperous 
it  is  in  stronger  position  to  render  financial  assistance  to  the 
country.  There  is,  indeed,  an  interlocking  of  interest  and  a  con- 
sequent need  of  "cooperation"  between  the  city  and  country, 
and  the  best  results  can  only  be  obtained  by  a  spirit  of  harmony 
and  proper  understanding. 

The  builders  of  our  cities  have  been  able  to  obtain  financial 
assistance,  the  payment  of  which  is  extended  over  a  long  period 
of  years,  upon  buildings  erected  even  upon  leased  grounds.  The 
value  of  nearly  all  of  our  investments  and  properties  depends 
chiefly  upon  the  success  of  our  agricultural  interests.  Yet  we 
have  never  devised  d.  satisfactory  plan  to  finance  those  engaged 
in  that  industry  to  safely  carry  themselves  over  a  sufficient  period 
to  retire  even  a  fair  portion  of  the  purchase  price  of  their  fixed 
investment. 

I  am  not  criticizing  those  engaged  in  the  farm  loan  business 
as  now  conducted.  A  market  has  been  established  for  real 
estate  security  on  the  present  basis,  and  our  lenders  are  handling 
this  business  along  the  only  recognized  method  employed  in 
America. 

It  would  not  be  feasible  to  adopt  the  long-term  plan  with 
small  partial  payments  where  the  loan  itself  is  lodged  with  the 
individual  investor.  He  will  not  accept  of  a  loan  on  these  terms, 
and  it  would  be  only  through  the  intermediary  of  some  bond  or 


76  SELECTED    ARTICLES 

debenture  issuing  organization  that  funds  could  possibly  be  ob- 
tained for  the  farmer  under  such  conditions. 

The  European  countries  have  adopted  a  workable  plan  for 
their  farm  owners  by  the  organization  of  their  long-term  mort- 
gage associations,  which  are  not  banks  of  deposit.  This  system 
contemplates  the  return  of  the  principal  in  small  amounts  at  the 
same  time  interest  is  paid,  with  the  option  of  repayment  of  any 
larger  amount,  or  the  whole,  at  any  interest  pay-day. 

Only  income-producing  property  of  dependable  value  is 
loaned  upon.  The  annuity  to  be  paid  is  fixed,  which  includes  the 
amount  of  interest  and  amount  the  lending  association  requires 
for  its  expenses  and  profits.  The  longer  the  loan  the  smaller 
the  annuity.  When  speaking  of  rates,  the  European  farmer  and 
money-lender  on  land  mortgages  always  includes  the  amount  to 
be  paid  in  amortization.  Thus,  should  he  tell  you  the  rate  is 
six  per  cent  per  annum,  he  would  mean  that  $60  on  each  $1,000 
borrowed  is  the  amount  to  be  paid  each  year,  including  interest 
and  part  payment  of  the  principal  in  order  to  retire  the  loan  by 
the  time  of  its  maturity.  This  annuity  remains  the  same  through- 
out the  life  of  the  loan,  but  as  the  amount  of  the  principal  is 
gradually  reduced  the  amount  necessary  for  interest  becomes  less 
each  year,  and  the  amount  applicable  for  amortization  increases 
correspondingly.  It  is  this  calculation  that  retires  the  loan  within 
a  less  period  than  at  first  impression  seems  possible.  It  is  the 
operation  of  compound  interest  reversed. 

There  are  some  matters  that  enter  into  the  negotiation  of 
these  long-term  mortgage  loans  affecting  interest  rates  that  do 
not  appear  on  the  face.  For  instance,  in  the  operation  of  some 
of  these  land-mortgage  associations  the  borrower  is  given  bonds 
issued  by  the  land-mortgage  association  in  exchange  for  his 
mortgage.  The  borrower  accepts  the  bonds  at  one  hundred  cents 
on  the  dollar,  and  often  has  to  market  them  himself.  They, 
however,  generally,  have  a  ready  market  on  the  Bourse  or  with 
commercial  and  private  banks,  but  do  not  sell  at  par  when  draw- 
ing the  low  rates  of  interest. 

Some  of  the  land-mortgage  associations  have  perfected  ar- 
rangements for  cashing  their  bonds  thus  accepted  by  the  bor- 
rower, through  commercial  banking  institutions  which  they  them- 
selves control  or  with  which  they  are  affiliated,  so  that  their 
borrowers  need  not  be  forced  to  find  their  own  market. 


AGRICULTURAL    CREDIT  ^^ 

Originally  the  land-mortgage  associations  came  into  exist- 
ence through  a  combination  of  borrowers  who  united  for  their 
mutual  assistance.  As  at  first  organized  they  were  co-operative 
to  the  highest  degree.  The  owners  of  farms  severally  mort- 
gaged their  properties  to  a  co-operative  association  and  the 
collective  mortgages  thus  became  liable  for  the  debts  of  one  and 
all.  The  association,  with  no  other  capital  than  possibly  a 
nominal  membership  fee  charged,  would  issue  its  own  bonds, 
allowing  each  borrower  the  use  of  such  bonds  to  the  extent  of 
his  individual  needs  from  time  to  time,  to  the  limit  of  his  own 
mortgage.  In  retiring  his  loan  to  the  association,  in  whole  or 
in  part,  the  borrower  could  repurchase  the  bonds  on  the  market 
or  from  whatever  source  available,  delivering  them  to  the  asso- 
ciation in  payment  of  his  loan  or  could  pay  cash,  if  preferred. 
If  the  latter,  the  association  would  call  in  the  equivalent  amount 
in  bonds. 

Often  the  borrower  would  not  ask  for  the  cancellation  of  his 
mortgage,  leaving  it  on  record  in  case  of  future  needs,  against 
which  he  could  draw  bonds  in  such  denominations  as  needed  from 
time  to  time.  This  system  has  now  been  modified  so  that  each 
borrower  is  responsible  only  for  his  own  individual  debt,  but 
remains  the  same  in  all  other  respects. 

Many  of  the  cooperative  land-mortgage  associations  are  fos- 
tered by  government  grants,  loans,  or  special  privileges  of 
law.  Indefinite  loans  are  sometimes  extended  them  by  the  gov- 
ernment without  interest,  or  at  a  very  low  rate,  as  was  mentioned 
is  sometimes  done  for  the  short-term  rural  credit  societies. 

In  Germany  these  associations  are  granted  exceptional  legal 
privileges,  and  in  foreclosing  a  mortgage  it  is  unnecessary  to  go 
through  any  process  of  law,  as  the  right  is  given  to  immediately 
dispossess  the  borrower.  He  has  no  redress  at  court,  the  asso- 
ciation being  a  law  unto  itself.  There  are  no  redemption  privi- 
leges given  the  borrower,  neither  has  he  any  exemptions.  The 
maintenance  of  the  farm  and  fertilizing  and  productiveness  of 
the  soil  are  conditions  in  the  mortgage.  In  case  this  is  not  done 
it  is  a  cause  for  foreclosure,  the  same  as  default  in  interest  or 
amortization  payments. 

Private  capital  is  now  successfully  competing  with  these  gov- 
ernment-fostered associations  in  the  organization  and  operation 
of   long-term   mortgage  banks.     Such   privately   capitalized   as- 


78  SET.RrTRI)   AKTICLES 

sociations  do  not  receive  or  desire  government  subsidy.  They 
are  less  hampered  in  their  operations,  and  having  laws  that  fully 
protect  their  securities,  prefer  to  operate  independently  of  the 
government. 

Bonds  issued  by  botli  government-fostered  and  privately 
owned  land-mortgage  associations  sell  on  a  substantial  parity. 
In  some  countries,  Hungary  particularly,  an  especial  effort  is 
made  to  place  these  bonds  outside  their  own  country,  in  order 
to  bring  in  new  capital,  but  in  Germany  exactly  the  opposite  is 
pursued.  They  have  proven  to  be  such  safe  and  desirable  se- 
curities that  the  savings  of  the  working  class  as  well  .is  trust 
and  court-controlled  funds  are  invested  in  them. 

The  large  commercial  and  private  banks  often  underwrite  the 
issues,  replacing  them  with  the  investing  public.  These  bonds 
command  a  price,  after  reaching  the  market,  near  that  com- 
manded by  government  bonds,  and  usually  sell  on  an  equality 
with  state  or  provincial  bonds,  and  on  better  terms  than  in- 
dustrials. 

In  endeavoring  to  make  applicable  any  long-term  mortgage 
system  for  this  country,  the  fact,  as  already  noted,  must  be  kept 
constantly  in  mind  that  the  farmer  of  America  is  quite  a  different 
individual  from  the  farmer  of  European  countries.  There  he 
operates  under  nominal  expense  as  compared  with  the  farmer  in 
this  country,  as  well  as  operates  on  a  much  smaller  scale.  The 
European  farmer  applies  himself  to  a  greater  degree  and  is 
more  scientific  in  the  handling  of  his  land  and  products.  While 
the  average  farm  in  Europe  is  small,  varying  in  size  with  the 
different  countries,  about  twice  the  yield  is  obtained  per  acre 
that  is  obtained  by  the  American  farmer,  owing  to  intense  culti- 
vation and  more  scientific  methods.  The  earning  capacity  of 
the  European  farm  is  an  established  fact.  That  in  turn  estab- 
lishes its  value.  So  settled  are  the  values  that  the  basis  of  as- 
sessment for  taxation  purposes,  which  is  made  at  one  hundred 
cents  on  the  dollar,  is  generally  used  as  a  basis  for  valuing  prop- 
erty when  granting  loans.  Among  the  most  important  advantages 
for  facilitating  loans  on  real  estate  in  Europe  is  the  title-regis- 
tration law,  which,  in  effect,  places  the  government  behind  the 
title  to  all  property,  and  is  an  important  factor  in  obtaining  low 
rates  of  interest. 

It  must  be  understood  that  the  method  to  be  pursued  in  this 


AGRICULTURAL   CREDIT  79 

country  under  existing  conditions,  should  any  long-term  mort- 
gage system  be  devised,  necessarily  would  be  quite  different  from 
the  European  methods.  The  rate  of  interest  to  be  paid  by  our 
farmers  would  of  necessity  have  to  be  higher,  because  of  the 
expense  incident  to  appraisement;  because  of  exemption  and 
redemption  laws;  because  of  the  general  lack  of  title-registration 
laws  and  the  consequent  need  of  abstracting  and  title  examina- 
tion;  because  of  the  necessity  of  safeguarding  the  loan  by  watch- 
ing the  security  that  has  not  such  a  stable  or  definite  income- 
producing  value  over  an  extended  period ;  and  for  the  further 
reason  that  a  market  would  have  to  be  built  up  for  this  class 
of  investment.  Whereas,  throughout  all  European  countries 
this  class  of  investment  is  now  well-established,  their  land-mort- 
gage associations  having  been  in  successful  operation  for  over 
a  century  without  the  loss  of  a  dollar  to  an  investor. 

However,  I  do  not  believe  the  need  of  the  American  farmer 
is  so  much  for  a  low  rate  of  interest  on  his  mortgage  loan,  if 
he  is  furnished  a  reasonable  one,  as  for  a  method  that  will  give 
him  a  sufficient  period  to  work  out  of  debt  from  the  income  of 
his  labor  and  invested  capital,  without  being  compelled  to  obtain 
several  renewals,  paying  new  commissions,  abstract  charges,  at- 
torney's and  recording  fees  with  each  renewal. 

Through  operation  of  the  long-term  amortization  loan  system 
the  European  countries  have  revolutionized  the  land  ownership, 
passing  titles  from  large  tracts  of  landlordism  into  small  tracts 
belonging  to  the  individual  farmers,  making  permanent  home 
owners  out  of  former  tenants.  They  have  assisted  in  making  farm 
life  more  inviting  and  in  improving  farm  property  to  a  high  state 
of  cultivation,  thereby  increasing  the  productivity  of  the  land, 
and,  as  a  natural  result,  enhancing  the  value  of  the  land  itself. 

I  trust  I  have  made  clear  the  general  underlying  principles 
of  the  two  distinct  European  systems  for  extending  rural  credits. 
I  have  purposely  avoided  technical  terms  and  foreign  names, 
in  order  to  present  the  subject  in  such  manner  that  I  felt  might 
be  most  readily  understood. 

In  establishing  any  such  system  in  this  country,  all  tendency 
toward  paternalism  will  have  to  be  eliminated,  for  the  idea  is 
repugnant  to  our  form  of  government,  and  besides  our  farmers 
do  not  desire  to  be  pampered.  All  they  ask  is  an  equal  chance 
with  those  engaged  in  other  industries. 


8o  SELECTED   ARTICLES 

It  is  my  firm  belief  that  no  European  cooperative  system  for 
obtaining  short-term  personal  credit  can  be  made  generally  ap- 
plicable to  the  American  farmer.  In  addition  to  the  unnecessary 
burden  of  assumed  guaranty  of  one  another,  the  plan  itself  is 
unnecessary ;  because  with  proper  modifications  of  existing  sys- 
tems, our  present  country  banks,  capitalized  and  already  in  the 
field,  holding  the  unemployed  funds  of  their  respective  communi- 
ties, owned  largely  by  the  farmers  themselves,  can  be  made  to 
meet  all  legitimate  requirements  for  short-term  personal  credits, 
where  such  credits  could  be  safely  extended  under  any  system 
operating  upon  deposits. 

But  I  do  believe  we  can  mold  a  long-term  land-mortgage  sys- 
tem out  of  some  of  the  methods  employed  in  European  countries 
that  will  be  applicable  to  the  needs  of  the  American  farmer. 
Not  on  the  cooperative  or  mutual  guarantee  plan  as  practiced 
in  Europe,  however.  I  am  confident  we  can  devise  a  plan  which 
will  bring  about  a  system  of  cooperation,  throughout  a  state, 
without  the  mutual  guarantee  feature ;  one  that  would  at  once 
inspire  the  confidence  of  the  investor  in  farm  securities  and  re- 
ceive the  hearty  support  of  the  country  bankers  as  well  as  the 
city  financiers,  at  the  same  time  putting  the  control  in  the  hands 
of  the  farmers  themselves.  It  seems  to  me  this  would  be  an 
ideal  system  of  "cooperation,"  and  no  system  is  going  to  prove 
a  success  in  this  country  without  such  general  cooperation.  I 
admonish  you  to  keep  in  mind  that  the  word  "cooperation"  is 
being  overworked  and  played  upon  by  the  erstwhile  self-advertis- 
ing politician.  What  we  need  is  sane,  safe,  and  conservative 
consideration  of  this  matter,  and  a  practical,  not  theoretical,  a 
business,  not  political  plan  that  can  be  worked  out. 


Everybody's.     31:61-4.     July,    1914. 

Unfinancial  Farmer.     John  Parr. 

Of  all  the  many  kinds  of  money-borrowers  in  the  world  the 
American  farmer  in  the  average  is  the  readiest  and  the  worst. 
The  private  banker  is  his  immemorial  enemy.  During  the  debate 
in  Congress  on  the  Federal  Reserve  Act,  under  which  the 
national  banking  system  of  the  country  now  is  reorganizing,  I 


AGRICULTURAL   CREDIT  8i 

surprised  a  Republican  farmer  in  the  act  of  beating  the  fence 
with  his  hat   and  shouting  for  Wilson. 

"What's  happened?"    I  asked. 

"I'm  for  Wilson,"  he  said. 

"Why?" 

"Just  read  in  the  paper  that  he's  going  to  make  these  national 
banks  lend  money  on  farms." 

He  was  the  least  efficient  farmer  in  the  township,  as  I  knew, 
and  before  the  spring  opened  he  got  rid  of  his  mortgage  by  mov- 
ing away  from  it.  He  was  succeeded  by  an  industrious  young 
married  man  who  rented  the  place  for  three  years  from  the 
mortgagee  at  too  high  a  rental,  and  is  bound  to  fail  with  it 
because  he  can  not  afford  to  put  into  the  ground  more  than  he 
can  be  sure  of  getting  out  of  it  again  before  his  lease  expires, 
which  means  that  he  will  leave  the  farm  in  no  better  condition 
than  he  found  it,  having  got  in  the  meantime  a  very  thin  living. 

Tenant-farming  on  short  leases  is  desperately  poor  use  to 
make  of  land.  If  this  young  man  could  borrow  money  at  41/2  or 
5  per  cent  interest  to  buy  that  farm,  with  the  privilege  of  paying 
back  the  principal  in  small  annual  instalments  spread  over  twenty 
or  thirty  years,  he  would  be  a  proprietor  instead  of  a  tenant, 
his  heart  would  be  in  it,  the  soil  would  be  coddled,  and  where 
now  the  yield  of  corn  is  not  more  than  twenty-five  bushels  to 
the  acre,  it  might  easily  be  fifty. 

But  he  is  without  any  capital  at  all — that  is,  financial  capital. 
He  has  only  his  strength  and  youth  and  his  willingness  to  work. 
It  is  hard  to  borrow  on  that  kind  of  security,  though  it  is  often 
the  very  best  a  lender  could  have. 

The  difficulty  is  that  the  lender  is  seldom  in  a  position  to 
know  the  personal  character  of  the  borrower.  He  takes  his  se- 
curity in  the  land  and  its  improvements,  at  50  or  60  per  cent 
of  their  appraised  value.  He  acts  through  an  agent,  who  reports, 
not  on  the  borrower,  but  on  the  property.  A  farm,  say,  is  rated 
as  worth  $S,ooo;  the  agent  advises  his  clients  to  lend  $2,500  on  it, 
at  5  or  6  per  cent,  as  the  rate  may  be. 

If  the  young  man  goes  to  an  agent  and  says :  "I  want  to  bor- 
row $5,000  at  5  per  cent  and  pay  it  off  in  twenty  years,"  the  agent, 
whether  he  represents  an  individual  client  with  money  to  lend 
or  a  financial  institution  or  a  mortgage-loan  firm,  answers  that 
twenty-year  loans  are  unknown.    Farm  mortgages  are  placed  for 


82  SELECTED   ARTICLES 

periods  of  three  or  five  years.  Tlien  if  the  young  man  says: 
"All  right;  I  want  to  borrow  $5,ooo  for  five  years,"  the  agent 
will  have  to  say,  "That  is  impossible.  Your  farm  is  worth  only 
$S,ooo.  The  most  anybody  would  lend  you  on  mortgage  would 
be  $2,500  or  possibly  $3,000. 

It  is  useless  for  the  young  man  to  say  that  he  will  l)e  in- 
dustrious and  saving,  as  his  predecessor  was  not,  and  that  he  is 
an  efficient  farmer,  as  the  other  knew  not  how  to  be.  None  of 
that  passes  as  security  for  a  loan. 

But  even  if  it  were  possible  for  him  to  borrow  the  full  value 
of  the  farm,  on  a  long-term  mortgage,  as  it  is  in  some  countries 
of  Europe,  notably  Denmark,  where  the  government  lends  the 
money,  he  would  yet  be  in  need  of  another  kind  of  credit,  called, 
for  distinction,  short-term  credit,  such  as  a  merchant  obtains  at 
his  bank. 

He  will  want  to  buj^  fertilizer  in  the  fall  and  winter,  and 
seed  in  the  spring,  and  perhaps  some  pigs  and  a  cow,  all  of 
which  are  needed  to  bring  the  productivity  of  the  farm  to  its 
■  maximum.  If  he  can  borrow  the  money  for  these  purposes,  for 
periods  of  a  few  months  or  a  year,  paying  it  back  as  the  produce 
is  sold,  he  will  gain  more  for  himself  and  enrich  society.  That 
is  as  every  business  other  than  farming  is  conducted.  The  man- 
ufacturer or  the  merchant  sells  long-term  bonds  for  his  fixed 
capital,  and  then  borrows  currently  at  the  bank  for  what  the 
accountants  call  his  working  capital. 

In  theory  it  is  the  same.  In  practice  it  is  very  different.  The 
merchant  or  manufacturer  borrows  both  fixed  and  zcorking 
capital  much  more  easily  and  at  lower  rates  of  interest  than  the 
farmer  can,  and  in  thousands  of  cases  the  proportion  of  his 
own  capital  to  that  which  is  borrowed  is  much  less  than  would 
be  expected  of  a  farmer.  Indeed,  the  big  gains  in  commerce  and 
trade  are  made  by  those  who  know  how  to  keep  that  proportion 
small — how  to  prorate  the  earnings  of  borrowed  capital  over  a 
very  small  proprietor's  investment. 

Thus,  if  a  man  has  $10,000  of  capital  and  wishes  to  engage 
in  a  business  the  normal  profits  of  which  are  10  per  cent,  and 
can  borrow  $90,000  at  5  per  cent,  he  has  in  his  service  $100,000. 
His  gross  profit  will  be  $10,000,  out  of  w^hich  he  pays  5  per  cent 
($4,500)  on  the  $90,000  which  he  has  borrowed,  and  has  $5,500 
for  himself.     That  is  55  per  cent  on  his  own  capital  of  $10,000. 


AGRICULTURAL   CREDIT  83 

That  kind  of  finance  has  been  impossible  for  the  farmer,  to 
whom  capital  is  not  only  much  dearer  but  much  less  accessible. 
When  he  borrows  fixed  capital,  on  a  mortgage,  he  pays  i  or  2 
per  cent  more  for  it  than  the  interest  rate  on  corporation  bonds, 
which  represents  the  fixed  capital  of  other  business ;  and,  besides, 
it  comes  due  every  few  years — either  three  or  five — and  has  to 
be  renewed,  whereas  the  corporation  bond  runs  for  fifty  years 
and   maybe  longer. 

And  when  the  farmer  has  to  borrow  zvorking  capital  he  pays 
a  price  which  in  business  would  be  prohibitive.  Instances  of 
negro  farmers  in  the  South  paying  60  and  100  per  cent  a  year 
for  small  loans  are  not  unknown;  instances  of  15  and  20  per 
cent  are  common  all  over  the  country. 

The  farmers  do  manage  to  borrow  capital  of  both  kinds. 
Their  total  indebtedness  in  this  country  is  estimated  at  nearly 
$6,000,000,000,  of  which,  roughly,  one-half  is  owed  on  mortgages 
and  the  other  half  to  banks  and  implement  firms  and  storekeep- 
ers and  merchants ;  but  they  borrow  in  the  most  wasteful  manner, 
and  the  cost  of  "it,  mind  you,  is  a  burden  upon  the  cost  of  food. 

The   Reasons 

The  reasons  are  obvious  enough.  Commerce  borrows  capital 
more  cheaply  and  more  easily  than  agriculture  because,  mainly, 
commerce  is  concentrated.  The  banker  knows  his  commercial 
borrower  personally,  sees  him  every  day,  and  is  continually  hear- 
ing reports  on  his  conduct ;  or,  if  that  is  not  the  case,  then  the 
commercial  borrower  at  a  distance  has  a  credit  rating  in  Dun's 
or  Bradstreet's.  With  an  agricultural  borrower  it  is  different. 
The  farmer  comes  to  town  occasionally,  and  the  banker  who  has 
loaned  him  money  on  his  note  may  not  see  him  again  until  the 
note  is  due. 

The  farmers  ought  to  manage  their  own  credit  better.  That 
is  clear  enough.  Without  legislation  of  any  sort  they  could  form 
voluntary  credit  associations  to  guarantee  each  other's  liabilities, 
and  undertake  not  only  to  vouch  for  the  character  of  borrowers 
but  to  see  that  the  money  borrowed  is  properly  spent  and  safe- 
guarded ;  they  could  go  so  far  as  to  report  regularly  to  the 
bankers  from  whom  they  obtain  accommodations.  Bankers  would 
he  very  willing  to  lend  money  on  the  credit  paper  of  such  associ- 
ations, and  at  much  lower  rates  of  interest  than  any  individual 


84  SELECTED   ARTICLES 

borrower  could  obtain.  Collective  responsibility  makes  perfect 
security,  and,  tbough  many  farmers  are  reluctant  to  think  so, 
the  quality  of  the  security  largely  determines  the  rate  of  interest. 

Or  they  could  form  credit  unions  of  their  own,  with  small 
capital,  even  with  borrowed  capital,  and  help  themselves.  Jewish 
colonists  have  done  this  very  successfully  already  in  several 
states,  under  the  direction  of  Leonard  G.  Robinson,  general 
manager  of  the  Jewish  Agricultural  and  Industrial  Aid  Society. 

But  this  involves  a  degree  of  cooperation  of  which  the  Amer- 
ican farmer  so  far  has  seemed  incapable. 

To  a  government  official  intensely  interested  in  the  uplift  of 
agriculture,  especially  in  this  matter  of  freer  and  cheaper  capital, 
I  put  this  question : 

"Is  the  American  farmer  at  heart  a  co-operative  animal?" 

"He  can  be  taught,"  was  the  answer.  "Aly  notion  is  that  the 
way  to  teach  farmers  the  use  of  cooperative  credit  is  to  demon- 
strate it  as  you  do  agricultural  implements  or  scientific  cultiva- 
tion. Give  them  the  examples  and  let  them  think.  The  farmers, 
as  you  may  never  have  happened  to  consider,  are  an  intellectually 
idle  class.  A  great  deal  of  their  work  keeps  them  physically 
active  and  mentally  idle.  A  man  plowing  his  field,  one  long 
furrow  after  another,  thinks  enviously  of  the  rich,  imagines  all 
the  world  to  be  in  a  conspiracy  to  defraud  him,  and  remembers 
everything  he  has  read  in  his  newspaper.  He  reads  the  news- 
papers, especially  the  radical  ones.  And  he  dreams  of  something 
to  make  him  rich — suddenly  rich.  He  wants  more  land,  not  to 
till  but  to  hold  for  a  rise." 

"He  is  at  heart  a  speculator?" 

"Exactly." 

These  are  some  of  the  elemental  aspects  of  that  vast  and 
difficult  subject  now  going  under  the  name  of  Rural  Credit. 

It  is  in  two  parts.  There  is  the  problem  of  land  credit  by 
itself.  That  is  to  enable  the  farmer  to  borrow  fixed  capital  at 
low  rates  of  interest  on  long-term  mortgages  which  he  pays  off 
in  small  annual  instalments. 

Then  there  is  the  problem  of  personal  credit.  That  is  to 
enable  the  farmer  to  borrow  working  capital  on  the  security 
mainly  of  his  character  and  industry. 

Besides,  there  is  the  much  more  debatable  question  whether 
the    land   credit,    on   long-term    mortgages,    should   be    designed 


AGRICULTURAL   CREDIT  8$ 

for  the  solvent  farmer  only,  or  for  the  insolvent  farmer  too. 
The  solvent  farmer  is  one  who  has  some  financial  capital,  and 
needs  only  to  be  assisted.  The  insolvent  farmer  is  one,  like  the 
young  man  at  the  beginning  of  this  article,  who  has  no  financial 
capital  at  all  and  needs  the  whole  start.  A  land-credit  scheme 
under  which  one  could  borrow  at  low  rates  of  interest  only  50 
per  cent  of  the  value  of  one's  land  would  be  a  great  benefit  to 
the  solvent  farmer;  but  it  would  still  leave  the  insolvent  farmer 
where  he  is,  working  for  solvent  farmers  or  as  a  tenant. 

That  is  a  question  of  public  policy  which  has  been  dealt  with 
in  various  ways  abroad.  In  Russia,  Denmark,  and  France  the 
government  has  used  its  credit  directly  to  put  land  into  the 
hands  of  insolvetit  farmers.  England  is  doing  it  for  the  Irish 
farmers,  of  whom  in  the  last  seven  years  385,000  tenants  have 
become  farm-owners.  They  have  eighty-seven  years  in  which 
to  pay  the  government  back. 

To  Buy  Back  Our  Heritage 

That  the  European  Land  Problem  should  have  arisen  in  this 
country  while  those  are  still  living  who  saw  land  free  for  the 
asking  and  approved  of  granting  millions  of  acres  of  the  public 
domain  in  the  form  of  subsidies  to  railways,  shows  how  rapidly 
the  world  fills  up,  and  how  precious  land  is.  Many  are  now  de- 
manding that  the  government  shall  lend  people  the  money  with 
which  to  buy  back  the  land  it  gave  away  to  the  railways. 

Two  years  ago  the  Southern  Commercial  Congress  undertook 
for  the  first  time  in  this  country  a  comprehensive  study  of  the 
whole  subject  of  Rural  Credit  and  appointed  a  commission  to  see 
what  had  been  attempted  and  accomplished  abroad.  Then  the 
government  appointed  a  commission  to  cooperate. 

A  mass  of  evidence  was  collected  in  Europe,  where  for  over 
a  hundred  -years  farmers  had  been  cooperating  to  obtain  credit, 
to  market  their  produce  and  to  buy  their  supplies.  When  the 
commissioners  came  home  and  made  their  report  they  began  to 
learn  things  they  had  never  known  before  about  the  American 
farmer. 

At  last  Senator  Fletcher  and  Representative  Moss  evolved 
the  IVIoss-Fletcher  Bill,  which  was  submitted  to  the  President, 
amended  by  the  Secretary  of  Agriculture,  and  then  reported  to 
Congress.     Joint  hearings  were  held  before  sub-committees  of 


86  SELECTED   ARTICLES 

the  Committees  on  Banking  and  Currency  of  both  the  Senate 
and  the  House  of  Representatives. 

The  Moss-Fletcher  bill  provided  for  the  creation  of  farm- 
land banks,  to  be  formed  by  any  ten  persons,  to  be  either  private 
stock  banks  or  cooperative,  to  have  a  minimum  capital  of  $10,000, 
and  to  be  vested  v^^ith  specific  powers  as  follows : 

To  receive  deposits  up  to  50  per  cent  of  their  capital  and 
surplus ;  to  act  as  depositories  for  the  Postal  Savings  funds ;  to 
make  first-mortgage  loans  on  farm  lands  up  to  50  per  cent  of 
their  appraised  value;  and  to  issue  and  sell  to  investors  col- 
lateral bonds  secured  by  those  mortgages,  the  amount  of  bonds 
any  one  bank  could  issue  being  limited  to  fifteen  times  its  capital 
and  surplus. 

Thus,  a  farm-land  bank,  with  $10,000  capital,  could  buy  first 
mortgages  and  issue  collateral-trust  bonds  against  them  up  to 
$150,000. 

The  objection  to  this  bill  on  the  part  of  economists  and  bank- 
ers and  men  of  affairs  generally  was  that  a  lot  of  small  banks 
all  over  the  country  would  be  issuing  bonds,  individually,  so  to 
speak,  as  farmers  have  always  borrowed  monej',  and  that  in- 
vestors would  not  take  the  trouble  to  investigate  the  standing 
and  character  of  every  bank,  any  more  than  of  an  individual 
farmer. 

The  objections  heard  from  farmers  were  various.  One  was 
that  it  placed  the  whole  rural-credit  scheme  in  the  hands  of  banks 
run  for  profit.  Another  was  that  it  did  not  help  the  insolvent 
farmer,  with  no  capital  to  begin  with.  Another,  that  it  did  not 
solve  the  questions  of  personal  or  short-term  credit. 

State  Aid 

The  farmer,  plowing  his  long  furrows,  has  time  to  grow  very 
suspicious.  Mr.  T.  C.  Atkeson,  representing  the  National  Grange, 
said :  "As  I  talk  to  them  personally,  they  seem  to  be  possessed 
with  one  fear  more  than  any  hope.  That  is  the  fear  that  some 
kind  of  job  wdll  be  put  on  them  that  it  will  take  a  generation  or 
two  to  get  rid  of." 

The  Hon.  E.  R.  Bathrick,  Representative  in  Congress  from 
Ohio,  speaking  for  his  own  bill  authorizing  the  government  to 
borrow  money  at  3j^  per  cent  and  lend  it  to  farmers  at  4]4  per 


AGRICULTURAL   CREDIT  87 

cent,  said :  "What  we  need  to  do  is  for  the  government  to  ham- 
mer down  the  interest  rate." 

After  the  close  of  hearings  on  the  Moss-Fletcher  Bill,  the 
notion  grew  among  those  in  charge  of  Rural  Credit  legislation 
that  direct  government  aid  was  both  politically  expedient  and 
economically  desirable,  and  then  appeared  "The  Federal  Farm- 
Loan  Act"  called  the  Bulkley  Bill,  providing — 

That  any  five  persons  may  form  a  cooperative  farm-loan 
association,  like  a  mutual  building-loan  association,  for  the  pur- 
pose of  lending  money  to  its  stockholders  up  to  fifty  per  cent 
of  the  value  of  the  land  and  to  twenty-five  per  cent  of  the  value 
of  the  land's  improvement,  on  first  mortgage  maturing  in  five 
to  thirty  years ; 

That  each  farm-loan  association  shall  contribute  at  least 
$1,000  to  the  capital  stock  of  a  Federal  Land  Bank; 

That  there  shall  be  twelve  Federal  Land  Banks  of  $500,000 
capital  each  to  supervise  the  farm-loan  associations,  and  that  the 
Federal  Land  Banks  in  turn  shall  be  supervised  by  the  Federal 
Reserve  Board  at  Washington ; 

That  these  Federal  Land  Banks  shall  issue  farm-land  bonds, 
engraved  by  the  United  States  government  and  secured  by  the 
mortgages  assigned  to  them  b}',  and  purchased  by  them  from,  the 
farm-loan  associations ; 

That  in  the  event  of  the  $500,000  capital  stock  of  each  of 
twelve  Federal  Reserve  Banks  failing  to  be  otherwise  subscribed, 
the  United  States  government  shall  provide  it,   and, 

"That  the  Secretary  of  the  Treasury  shall,  upon  application 
of  one  or  more  of  the  Federal  Land  Banks  .  .  .  and  upon 
the  recommendation  of  the  Federal  Reserve  Board,  purchase 
from  Federal  Land  Banks  farm-loan  bonds  not  previously  issued 
or  sold,  in  an  amount  not  to  exceed  $50,000,000  during  any  one 
year,  and  shall  pay  for  the  same  out  of  any  money  in  the  Treas- 
ury not  otherwise  appropriated." 

So  the  United  States  government  would  be  required  to  guar- 
antee in  the  first  place  $6,000,000  capital  for  twelve  Federal 
Land  Banks,  and  thereafter  to  purchase  $50,000,000  farm-loan 
bonds   annually. 

That  is  directly  to  subsidize  the  farming  industry  in  this 
country,  as  some  foreign  governments  have  thonglit  it  wise 
to  do. 


88  SELECTED   ARTICLES 

Are  we  ready  to  do  that? 

The  demand  for  state  aid  to  agriculture  comes  from  the  farm- 
ers, of  course;  but  it  is  concurred  in  by  a  great  many  people  who 
believe  the  food  cost  of  living  in  that  way  may  be  reduced.  The 
farmer,  however,  is  not  anxious  to  cheapen  food.  He  seeks  to 
increase  the  profits  of  his  industry.  Thirty  years  ago  there  was 
such  an  overproduction  of  food  that  corn  would  not  bear  the 
cost  of  transportation  and  was  burned  for  fuel.  The  agricultur- 
ist then  was  poor,  indeed ;  yet  state  aid  was  never  proposed. 
What  he  demanded  at  that  time  was  a  lower  range  of  freight 
rates  to  the  food-consuming  East.  He  got  it.  That  was  the 
Granger  Movement. 


Popular  Science  Monthly.     82:252-63.     March,   1913. 

How  European  Agriculture  Is  Financed.     H.  C.  Price. 

The  American  farmer  is  ahead  of  the  European  in  many 
things,  particularly  in  the  use  of  labor-saving  machinery.  But 
in  the  application  of  business  principles  in  their  financial  opera- 
tions, the  European  farmers  have  perfected  systems  that  are  in 
advance  of  anything  yet  attempted  in  America.  This  has  been 
largely  brought  about  by  the  force  of  circumstances  necessitating 
an  economic  transformation.  During  the  last  century  the  com- 
petition of  new  countries  with  immense  areas  of  virgin  soil 
flooded  the  European  markets  with  agricultural  products  and 
forced  the  European  farmers  to  reorganize  their  business 
methods. 

As  a  result  they  have  organized  to  make  available  abundant 
credit  at  low  rates  of  interest  and  on  favorable  terms  of  repay- 
ment. By  credit,  it  is  not  meant  that  the  farmer  gets  everything 
he  buys  on  time  without  paying  anything  on  it,  and  that  he  is 
in  debt  on  every  hand,  but  just  the  reverse.  It  means  he  has 
money  available  at  all  times,  so  that  he  may  pay  cash  for  every- 
thing he  buys,  thus  getting  the  benefit  of  the  lowest  cash  prices 
and  discounts.  His  credit  is  at  the  bank  and  not  at  the  store, 
and  through  the  bank  he  gets  the  loans  that  he  needs  at  rates 
of  interest  just  as  low  and  in  many  cases  lower  than  secured 
by  other  industrial  enterprises,  no  difference  how  large  or  how 
much  business  they  do.     But  to  accomplish  this  the  farmers  have 


AGRICULTURAL   CREDIT  89 

had  to  take  a  hand  in  the  banking  business  themselves.  They 
have  organized  on  a  cooperative  basis  to  secure  the  credit  they 
need  and  to  supervise  its  distribution  rather  than  leaving  it  to 
private  interests  to  supply  the  same.  By  so  doing  they  have 
reduced  rates  of  interest,  lengthened  the  time  for  which  loans 
are  made,  provided  for  the  repayment  of  loans  by  annual  install- 
ments, and  they  keep  the  money  in  the  rural  districts  and  prevent 
its  accumulation  in  the  large  cities. 

Sources  of  Capital 

The  sources  from  which  the  capital  is  drawn  that  is  thus  made 
available  to  the  use  of  the  farmers  may  be  classified  under  three 
heads:  (i)  subvention  from  the  government,  (2)  savings  de- 
posits of  the  farmers  and  rural  population,  (3)  from  the  sale 
of  bonds  secured  by  mortgages  on  farm  land. 

The  relation  of  the  governments  in  furnishing  agricultural 
credit  has  varied  greatly.  In  France  the  rural  banks  have  been 
established  for  the  most  part  on  funds  advanced  by  the  govern- 
ment without  interest.  This  policy  was  begun  in  1894  and  in 
1910  the  working  capital  at  the  disposal  of  the  rural  banks  which 
had  state  aid  amounted  to  71  million  francs  (between  14  and  15 
million  dollars),  of  which  40  million  francs  had  been  advanced 
by  the  government.  In  Austria  the  provincial  governments  have 
actively  assisted  in  the  establishment  of  rural  banks  to  furnish 
credit  for  farmers  and  have  advanced  loans  without  interest  to 
them.  In  Germany  the  government  has  indirectly  aided  the 
rural  banks  by  establishing  central  banks  founded  on  capital 
advanced  by  the  government,  in  most  cases  at  3  per  cent  interest. 
The  central  banks  in  turn  furnish  credit  to  the  rural  banks  and 
the  rural  banks  to  the  farmer.  The  Prussian  Central  Bank  at 
Berlin  now  has  a  capital  of  75,000,000  marks  from  the  Prussian 
government.  However,  its  business  is  not  confined  to  agricultural 
banks,  but  is  open  to  all  kinds  of  industrial  cooperative  associa- 
tions. It  receives  deposits  and  makes  loans  to  the  cooperative 
banks  throughout  the  kingdom  of  Prussia,  and  serves  as  a  com- 
pensating medium  between  the  different  cooperative  institutions. 
For  example,  if  a  rural  bank  has  large  deposits  and  a  surplus 
of  funds,  it  deposits  them  in  a  central  bank  to  be  loaned  to  some 
other  bank  in  need  of  funds. 


90  SELECTED   ARTICLES 

The  desirability  of  government  subvention  is  a  disputed  point, 
and  in  Germany  which  has  tlie  best  developed  system  of  agri- 
cultural credit  in  tlie  world,  many  are  opposed  to  it  as  being 
entirely  unnecessary  and  think  that  a  better  system  can  be  de- 
veloped without  it. 

The  second  source  of  capital,  savings  and  deposits  of  the 
farmers  and  rural  population,  is  the  most  important.  It  has  the 
advantage  of  developing  the  habit  of  saving  among  all  classes  in 
the  country  and  it  keeps  the  money  in  the  rural  districts  in  which 
it  is  earned.  In  Germany  alone  there  are  over  16,000  rural  sav- 
ings and  loan  banks  with  one  and  one  half  million  members 
and  deposits  of  over  $250,000,000.  Instead  of  being  deposited 
in  savings  banks  to  be  loaned  out  in  the  cities,  as  is  the  case  in 
America,  or  deposited  in  postoffice  savings  banks  to  be  loaned 
to  city  banks,  the  money  is  kept  in  the  rural  districts  and  loaned 
out  at  a  rate  of  interest  that  the  farmer  can  use  it  to  advantage. 

The  third  source  of  capital,  obtained  by  the  sale  of  bonds 
secured  by  mortgages  on  farm  lands,  was  the  first  form  of  co- 
operative agricultural  credit  established  in  Europe  and  was  begun 
in  Germany  in  1770.  Its  most  rapid  development,  however,  has 
been  within  the  last  thirty-  years,  and  at  the  present  time  the 
German  farmers  have  over  $1,000,000,000  borrowed  in  this  way, 
none  of  it  costing  them  more  than  4  per  cent  interest  and  in 
some  cases  it  is  as  low  as  3  per  cent. 

Agricultural  Credit  in   the  Province  of  Saxony 

The  agricultural  credit  institutions  of  the  province  of  Saxony 
in  the  kingdom  of  Prussia  are  as  highly  developed  as  in  any 
place  in  Europe  and  are  typical  of  the  German  system.  The 
province  of  Saxony  lies  in  central  Germany,  contains  an  area  of 
9,750  square  miles  and  in  1910  had  a  population  of  3,088,000, 
equal  to  315.7  per  square  mile.  The  largest  cities  in  the  province 
are  Halle  and  Magdeburg  with  180,000  and  280,000  population, 
respectively.  It  is  the  heart  of  the  sugar-beet  district  of  Ger- 
many and  the  richest  agricultural  section  of  the  entire  empire. 
It  contains  97,000  farms  of  over  five  acres  in  size.  The  esti- 
mated worth  of  the  land  per  acre  is  $300  (for  the  whole  of  Ger- 
many it  is  $150  per  acre).  It  is  a  typical  agricultural  province, 
in  which   the  most  intensive  systems   of   agriculture  have  been 


AGRICULTURAL   CREDIT  91 

developed,  necessitating  the  investment  of  a  large  working  cap- 
ital per  acre,  which  has  been  made  available  through  the  de- 
velopment of  agricultural  credit  institutions. 

These  may  be  divided  into  two  classes:  (i)  the  institutions 
furnishing  real  credit,  that  is,  loans  secured  on  farm  mortgages 
made  through  the  public  land  mortgage  bank — the  so-called 
Landschaft  of  the  province  of  Saxony,  (2)  institutions  for 
furnishing-  personal  credit,  that  is,  working  capital  on  short  time 
loans  and  on  personal  security  which  is  provided  through  the 
farmers'  cooperative  banks. 

The   Land   Mortgage   Association 

The  German  Land  Mortgage  Association  {Landschaft)  was 
first  established  in  1770  by  the  nobility  of  eastern  Germany,  with 
the  approval  of  Frederick  the  Great,  for  the  purpose  of  securing 
loans  on  their  farm  real  estates.  Instead  of  borrowing  individ- 
ually they  organized  an  association  and  issued  a  common  mort- 
gage bond  against  all  of  the  real  estate  owned  by  the  members  of 
the  association.  Furthermore,  the  management  of  the  associa- 
tion was  under  the  direct  control  of  the  government  and  the 
officers  were  quasi-public  officials.  Other  similar  institutions 
were  soon  established,  but  confined  their  members  to  the  no- 
bility and  large  landowners.  However,  the  results  secured  were 
so  satisfactory,  the  rates  of  interest  so  low  and  terms  of  the 
loans  so  favorable  that  the  plan  extended  and  the  farmers  of  the 
middle  classes  organized  in  a  similar  manner. 

The  province  of  Saxony,  in  which  the  farmers  of  the  middle 
class  predominate,  did  not  organize  a  land  mortgage  association 
until  1864.  A  few  years  later  came  the  war  between  France 
and  Prussia  (stopping  industrial  development)  so  that  in  reality 
the  association  did  not  make  real  progress  before  1880.  To-day 
the  total  mortgage  indebtedness  of  the  province  is  830,000,000 
marks,  and  over  220,000,000  marks  of  these  loans  have  been 
made  through  the  Provincial  Land  Mortgage  Association.  The 
proportion  of  the  loans  made  through  the  association  is  con- 
stantly increasing  and  within  the  last  six  months  they  have  in- 
creased 10,000,000  marks,  but  the  time  probably  will  never  come 
when  all  of  the  outstanding  mortgage  loans  will  be  made  through 
the  land  mortgage  associations,  as  in  many  cases  mortgages  are 


92  SELECTED   ARTICLES 

given  by  members  of  families  in  settlements  of  estates,  loans  are 
made  within  families  and  through  other  private  interests,  so 
that  in  no  case  is  it  likely  that  over  two  thirds  of  the  mortgage 
indebtedness  of  a  province  will  be  made  through  a  public  credit 
institution. 

The  Business  of  the  Land  Mortgage  Association 

The  Land  IMortgage  Association  of  the  province  of  Saxony, 
which  is  typical  of  all  other  similar  institutions  in  Germany,  is  a 
cooperative  union  of  the  landowners  of  this  province  for  the 
purpose  of  securing  loans  for  its  members  on  their  land  by  is- 
suing bonds  (Pfandbriefen)  against  the  same.  The  association 
is  not  a  stock  company.  No  profits  are  declared  to  individuals, 
but  go  to  the  reserve  funds  of  the  association.  Any  one  may 
become  a  member  who  is  a  landowner  in  the  province  and  pays 
a  land  tax  of  at  least  90  marks  per  year,  which  means  owning 
from  10  to  25  acres  of  land,  depending  upon  its  value. 

The  articles  of  the  incorporation  for  the  association  were 
approved  by  the  Prussian  government  and  the  oversight  of  the 
business  is  under  the  direction  of  the  Minister  of  Agriculture 
of  the  kingdom  of  Prussia.  The  association  is  independent  to 
conduct  its  own  afifairs  and  to  elect  its  own  officers,  but  the 
election  of  the  higher  officers  must  be  approved  by  the  govern- 
ment. A  farmer  wanting  to  borrow  through  the  association 
makes  his  application.  After  examination  of  the  title  of  his 
farm  and  finding  it  satisfactory  he  has  the  privilege  of  borrow- 
ing to  two  thirds  the  assessed  value  of  his  farm  for  taxation 
by  giving  first  mortgage  to  the  association  for  the  amount  he 
borrows.  The  association  does  not  have  the  money  on  hand 
to  make  the  loan,  but  secures  the  same,  not  by  selling  the  mort- 
gage, but  by  issuing  what  is  known  as  a  Pfandbrief  or  mortgage 
bond  of  equal  amount  to  the  mortgage  and  selling  the  bond. 
There  are  several  features  of  the  Pfandbrief  that  are  character- 
istic. First,  it  is  not  secured  alone  by  the  mortgage  of  the  farmer 
for  whom  it  was  issued  but  by  all  the  mortgages  and  property 
of  the  land  mortgage  association.  Second,  it  is  transferable 
without  endorsement  at  any  time  and  is  an  impersonal  security 
payable  to  bearer.  Third,  it  is  not  a  bond  in  the  sense  that 
it  runs  for  a  definite  length  of  time,  for  there  is  no  fixed  time 


AGRICULTURAL   CREDIT  93 

at  which  it  matures.  Fourth,  the  holder  does  not  have  the  riglit 
to  demand  payment  of  the  face  of  the  bond — that  is,  to  call  in 
the  loan — but  the  issuer — the  land  mortgage  association — has 
the  privilege  of  paying  it  at  any  time.  For  example,  the  bond 
may  be  called  in  and  paid  six  months  after  it  is  issued  or  fifty 
years,  at  the  pleasure  of  the  land  mortgage  association.  But 
under  no  conditions  is  the  amount  of  bonds  outstanding  per- 
mitted to  exceed  the  amount  of  mortgages  held  by  the  land 
mortgage  association. 

The  business  of  the  land  mortgage  associations  has  been 
done  so  conservatively  that  their  bonds  are  regarded  as  the  very 
best  of  security  and  are  favorite  investments  for  trust  funds, 
savings  banks  and  any  capital  seeking  a  perfectly  safe  invest- 
ment negotiable  at  all  times,.  In  fact,  these  bonds  sell  next  to 
government  bonds,  and  in  case  of  war,  or  even  threatened  war, 
they  sell  better.  The  government  may  be  overthrown  or  com- 
pelled to  suspend  payment  of  interest,  but  the  farm  real  estate 
that  secures  the  bonds  can  not  lose  its  value. 

The  rate  of  interest  the  bonds  bear  is  3  per  cent,  3^  or  4 
per  cent,  at  the  option  of  the  farmer  securing  the  loan,  but  the 
price  at  which  they  sell  depends  upon  the  condition  of  the  money 
market.  At  the  present  time  (July  i,  1912)  3  per  cent  province 
of  Saxony  Pfandhriefen  are  selling  at  81.00,  3^  per  cent  at  90 
and  4  per  cent  at  99.80,  while  the  4  per  cent  national  bonds  of 
Germany  are  selling  at  100.  In  case  a  farmer  borrowing  $1,000 
chooses  a  3  per  cent  interest  rate  and  the  3  per  cent  bonds  are 
only  selling  for  81.00,  he  gets  only  $810  and  pays  $30  per  year 
interest,  that  is,  per  cent  on  the  face  of  the  bonds,  and  gives 
his  note  and  mortgage  for  $1,000.  But  on  the  other  hand,  if  4 
per  cent  bonds  are  selling  at  par  and  he  chooses  a  4  per  cent 
loan,  he  gets  his  $1,000  in  cash  for  his  Pfandbricf  and  pays 
$40  per  year  interest  and  gives  his  mortgage  and  note  for  $r,ooo. 
It  is  always  regarded  as  the  best  policy  for  the  borrower  to 
choose  the  class  of  bonds  selling  nearest  par,  unless  they  are 
selling  above  par,  in  which  case  the  farmer  securing  the  loan 
gets  a  premium  over  and  above  the  amount  of  his  liability  and 
it  is  to  his  advantage  to  take  such  loans.  When  the  bonds  go 
above  par  they  are  called  in  and  paid  off  by  the  farmers  refund- 
ing their  debts  at  lower  rates  of  interest.  Here  comes  the  ad- 
vantage that  the  farmers  reserve  for  themselves  in  the  privilege 


94  SELECTED   ARTICLES 

of  paj'ing  off  the  bonds  at  will.  Just  such  a  thing  happened  when 
in  the  seventies  the  rate  of  interest  advanced  to  5  per  cent,  due 
to  the  scarcity  of  money  and  the  enormous  demand  for  it  in 
building  railroads  on  the  continent  and  ten  years  later  the  rates 
of  interest  sank  imtil  3  per  cent  bonds  sold  close  to  par  and  the 
farmers  rapidly  paid  off  their  loans  made  at  the  high  rate  of 
interest  by  using  new  bonds  at  the  lower  rate  of  interest  and 
selling  them  to  pay  off  the  old  ones. 

Central  Land  Mortgage  Association 

In  order  to  widen  the  market  for  the  Pfandbriefen  a  central 
land  mortgage  association  was  established  in  Berlin  in  1873.  By 
this  means  it  was  thought  to  make  them  an  international  security 
and  to  give  them  a  larger  market'.  The  bonds  of  the  central 
association  are  secured  by  all  the  mortgages  of  the  provincial 
associations  belonging  to  the  central  association.  The  results 
attained  through  the  central  association,  however,  have  not 
fulfilled  expectations.  The  Pfandbriefen  in  no  considerable 
extent  have  found  their  way  into  the  international  money  mar- 
kets. The  offering  of  them  in  such  large  quantities  on  the  Berlin 
Bourse  reduced  the  price  below  what  they  could  be  sold  for 
in  home  markets  through  the  local  banks.  Furthermore,  there 
is  a  sentiment  among  investors  buying  bonds  that  as  long  as  the 
provincial  bond  is  equally  as  secure  as  the  central  they  prefer 
to  invest  in  Pfandbriefen  of  their  own  province.  In  the  province 
of  Saxony,  with  its  220,000,000  marks  of  Pfandbriefen  outstand- 
ing, the  director  of  the  Landschaft  estimates  that  75  to  80  per 
cent  of  the  total  amount  invested  in  them  is  capital  of  the 
province  of  Saxony.  So  far  as  security  was  concerned,  nothing 
was  to  be  gained  by  consolidation  into  a  central  association,  since 
the  provincial  association  bonds  are  as  secure  as  bonds  can  be 
made. 

Of  the  total  amount  of  bonds  in  circulation  at  the  present 
time  only  about  10  per  cent  of  them  are  central  association 
bonds.  The  latest  statistics  show  that  the  provincial  and  central 
associations  of  Prussia  have  the  follow^ing  amounts  of  outstand- 
ing bonds. 


AGRICULTURAL   CREDIT  95 

Land  Mortgage  Association  of  Prussia 

Outstanding 

Founded.  Bonds. 
Association. 

East  Prussia   1788  426,152,350  M 

West  Prussia    1787  123,074,405  " 

New   West    Prussia 1861  186^278,210" 

Berlin     1868  449,563,500" 

Pomerania     1781  252,007,525  " 

New   Pomerania    1871  19,006,900" 

Posen     1857  301,525,300" 

Silesia    1770  608,634,180" 

Saxony    1864  126,675,600" 

Celle    1790  15,579,100" 

Hanover     1825  24,706,650" 

Bremen     1826  10,360,425" 

Westphalia     1877  74,554,300" 

Central     1873  433,255,000" 

Total     3,093,493,545" 

Mark  equals  23.8  cents. 

Amortisation  of  Loans 

One  of  the  most  valuable  features  of  the  loans  made  through 
the  land  mortgage  associations  from  the  standpoint  of  the  farmer 
is  the  gradual  amortization  through  annual  payments  made  with 
the  interest.  This  is  obligatory  on  the  part  of  the  borrower  and 
usually  is  1/2  per  cent  to  ^  per  cent  of  the  face  value  of  the 
loan.  In  the  land  mortgage  association  of  the  province  of  Sax- 
ony the  amortization  is  54  Per  cent  per  year.  On  a  loan  made 
at  4  per  cent  is  added  the  }i  per  cent  amortization  and  ^  per 
cent  to  cover  the  operating  expenses  of  the  association,  making 
a  total  of  5  per  cent,  and  by  paying  this  amount  annually  for 
between  forty  to  forty-five  years  the  loan  will  be  paid  off.  The 
farmer  in  the  meantime  also  has  the  privilege  of  paying  it  all  or 
in  part  at  any  time.  After  the  loan  has  been  made  the  rate  of 
interest  can  not  be  raised  or  the  loan  called  in,  so  if  the  farmer 
has  secured  his  loan  at  a  low  rate  of  interest  he  can  carry  it 
until  it  has  been  amortized  by  his  annual  payments.  The  Saxon 
farmers  who  in  the  nineties  borrowed  at  3  per  cent  and  got 
par  for  their  bonds  are  relishing  this  feature  now  that  the  rate 
of  interest  has  advanced  to  4  per  cent. 

However,  many  of  the  better  farmers  make  no  attempt  to 
pay  off  their  loans  any  faster  than  is  required  through  the  an- 
nual amortization  payment,  finding  that  they  can  get  their  credit 
cheaper  in  this  way  than  any  other  and  can  make  more  interest 
on  the  money  used  in  their  business  than  they  have  to  pay  for  it. 
The  association  also  has  the   provision  that   when   10  per   cent 


96  SELECTED   ARTICLES 

of  the  original  loan  has  been  paid  an  additional  loan  can  be  made 
and  in  this  way  a  farmer  can  continue  to  carry  indefinitely  prac- 
tically the  same  amount  of  loan  on  his  property  if  he  finds  it 
advantageous  to  do  so.  The  average  length  of  time  loans  run 
in  Saxony  is  about  twenty-five  years. 

By  this  method  the  farmer  gets  all  the  advantages  of  the 
money  market  if  money  is  tight — the  rate  of  interest  goes  up 
and  the  price  of  the  Pfandhriefen  go  down  when  money  is 
abundant  and  interest  rates  low  the  price  of  Pfandhriefen  go 
up.  The  farmer  through  his  bank  watches  the  money  market  and 
takes  advantage  of  the  low  points  in  interest  rates  to  secure 
his  loan,  and  once  made  he  is  safe  from  having  his  loan  called 
in  or  his  interest  rate  raised. 

Decentralizing  the  Business 

A  practical  point  in  the  operation  of  such  a  business  is  to 
make  it  as  convenient  as  possible  for  the  farmer  to  do  business 
with  the  land  mortgage  association.  The  province  of  Saxony 
is  a  territory  nearly  loo  miles  square  and  the  association  is 
located  in  Halle,  a  relatively  large  city.  For  all  of  the  farmers 
to  come  to  the  central  association  to  negotiate  their  loans  would 
be  impracticable  and  would  diminish  the  business  very  much. 
This  problem  has  been  solved  by  dividing  the  province  into  dis- 
tricts ID  to  IS  miles  square  and  in  each  district  is  a  local  officer 
of  the  association  elected  by  the  members  in  their  annual  meet- 
ing. This  officer  assists  the  members  in  getting  their  loans,  sends 
in  their  applications,  gives  information  concerning  the  associa- 
tion and  looks  after  the  business  in  his  district..  When  property 
is  appraised  for  loans,  he  is  chairman  of  the  committee  making 
the  appraisement.  When  interest  is  not  paid  or  a  member  is 
neglecting  his  farm,  the  local  deputy,  as  he  is  called,  serves  as 
the  medium  between  the  association  and  the  delinquent  member. 
In  this  way  the  advantages  and  economy  of  a  centralized  organ- 
ization and  at  the  same  time  the  benefits  of  a  decentralized  asso- 
ciation— that  is,  one  close  to  the  individual  farmer — are  secured. 

Personal  Credit 

While  the  land  mortgage  association  is  sufficient  to  provide 
the  long-time  credit  that  is  needed  by  the  landowner,  it  does  not 


AGRICULTURAL   CREDIT  97 

suffice  to  furnish  the  short-time  loans  that  are  needed  to  supply 
working  capital,  to  buy  seeds,  fertilizers,  livestock  to  be  fattened, 
to  pay  for  labor  to  grow  crops  and  such  operations  as  require 
capital  for  six  to  nine  months.  To  the  farm  renter  or  any  farmer 
who  does  not  own  land,  the  land  mortgage  association  has 
nothing  to  offer. 

To  meet  this  need  the  rural  banks  have  been  established.  Tlie 
work  of  this  class  of  banks  had  its  beginning  particularly  with 
William  Raiffeissen  among  the  peasant  farmers  of  western  Ger- 
many about  the  middle  of  the  last  century.  Raiffeissen  saw  the 
dire  straits  of  the  small  farmers  who  were  without  credit  and 
at  the  mercy  of  the  usurer.  He  began  by  establishing  coopera- 
tive associations  to  do  their  own  banking,  and  there  were  four 
fundamental  principles  that  he  insisted  upon  that  have  been 
retained  in  the  true  Raiffeissen  banks  of  the  present  time.  First, 
unlimited  liability  of  the  members.  This  was  necessary  in  the 
beginning  in  order  to  get  any  credit  at  all.  All  the  members 
were  practically  without  means  and  the  question  of  limited  or 
unlimited  liability  was  of  little  moment  to  them. 

Second.  A  restricted  area  of  operation  for  the  bank.  This 
was  confined  to  the  district  in  which  the  members  were  all  per- 
sonally acquainted  with  one  another.  In  European  farming  it  is 
customary,  especially  for  the  peasants,  to  live  together  in  small 
villages  and  not  on  single  farms  as  in  America,  so  that  the 
boundaries  for  the  operation  of  the  bank  were  generally  confined 
to  a   single  village. 

Third.  No  dividends  to  members.  A  low  rate  of  interest, 
usually  4  per  cent,  was  paid  on  the  capital  stock  each  member 
had  invested  in  the  bank,  but  all  profits  made  over  that  amount 
were  set  aside  in  a  reserve  fund. 

Fourth.  No  salaried  officers  were  employed  in  the  banks  ex- 
cept the  bookkeeper.  The  management  of  the  bank  was  made  a 
matter  of  honor,  the  work  to  be  done  without  any  mercenary 
compensation.  The  business  was  done  in  the  most  democratic 
manner  possible.  Every  member  was  given  a  voice  and  made  to 
feel  he  was  personally  responsible  for  the  success  of  the  business. 
Loans  were  made  for  specific  purposes,  for  example,  to  drain 
a  field.  The  committee  considered  the  advisability  of  the  pro- 
posed expenditure  in  making  the  loan,  the  members  of  the  bank 
all  knew   the  plan  of  the  member  and  w-ere  interested  in  his 


98  SELECTED   ARTICLES 

success,  because  in  case  the  member  failed  and  was  unable  to 
repay  his  loan  to  the  bank  they  would  all  be  losers. 

Raiffeissen  did  another  thing  that  is  of  utmost  importance 
in  rural  banking.  He  adjusted  the  loans  of  the  bank  to  meet  the 
needs  of  agriculture.  The  farmer  needs  a  longer  time  loan  than 
the  merchant  or  manufacturer.  City  loans  for  three  and  four 
months  do  not  fit  the  business  of  farming.  With  the  farmer  6 
to  9  months  is  the  shortest  time  for  which  he  needs  a  loan.  The 
time  from  planting  a  crop  till  it  is  harvested  and  ready  to  market 
is  at  least  six  months.  The  city  merchant  will  turn  over  his 
money  four  or  five  times  during  the  year  but  the  farmer  only 
once,  so  that  the  rural  banks  must  make  the  loans  for  longer 
periods  than  is  customary  in  the  city.  In  case  of  crop  failure  in 
bad  seasons  loans  must  be  allowed  for  still  longer  periods  and 
in  Raiffeissen  banks  these  provisions  were  made. 

From  their  beginning  in  the  Rhineland  the  Raiffeissen  banks 
have  spread  not  only  over  all  rural  Germany,  but  almost  all 
rural  Europe.  They  have  been  modified  to  meet  local  conditions 
but  with  it  all  have  kept  in  view  the  purpose  of  serving  the  needs 
of  the  farmer. 

In  studying  the  agricultural  banking  or  credit  system  of  a 
country  the  condition  of  the  individual  farmer  must  be  taken 
into  consideration.  A  system  applicable  to  peasant  farmers  with 
small  holdings,  such  as  are  found  in  many  parts  of  Europe,  is 
not  likely  to  offer  much  of  value  for  American  farmers.  But 
in  a  section  in  which  the  average  wealth  and  stand  of  the  farm- 
ers is  on  the  same  level  as  in  America,  a  system  that  is  proving 
successful  may   afford  some  good  lessons. 

Rural  Banks  in  tlie  Province  of  Saxony 

Such  a  section  is  to  be  found  in  the  province  of  Saxony  where 
the  rural  banks  are  splendidly  organized  and  doing  a  business 
of  $100,000,000  per  year. 

The  first  striking  difference  between  these  rural  banks  and  the 
original  Raiffeisen  banks  is  that  they  are  organized  on  a  limited 
liability  basis.  The  farmers  of  Saxony  for  the  most  part  are  well 
to  do,  but  they  vary  greatly  in  their  financial  worth.  The  man 
whose  property  is  worth  a  hundred  thousand  marks  is  not  willing 
to  become  a  member  of  a  rural  bank  or  a  cooperative  associa- 
tion of  any  kind  with  members  who  are  worth  only  five  thousand 


AGRICULTURAL   CREDIT  99 

marks    and    agree    to    an    unlimited    liability    for    its    members. 
Consequently  the   Saxon  banks   are  organized  limiting  the  lia- 
bility of  the  members   in  proportion  to  the   interest  they   have 
invested  in  the  bank.    The  fundamental  object  of  the  rural  banks 
is   to    furnish   credit  to    their  members    for   working  capital    at 
the  lowest  rates  of  interest  possible  and  not  to  make  a  profit 
on  their  business.    In  the  province  of  Saxony  there  are  660  rural 
banks.     These  are  small  village  savings  banks  with  an  average 
membership  of  about  100  farmers.     They  are  the  units  of   the 
farmers'   cooperative   organizations   of    the  province.     At   Halle 
there   are   three  central    cooperative   organizations,    with    all    of 
which    the    local    banks    stand    in    relation    and    are    members : 
(i)   The  Central  Cooperative  Bank,  which  does  nothing  but  a 
banking  business  and  whose  members   are  cooperative  associa- 
tions instead  of  individuals.     (2)   The  Central  Cooperative  As- 
sociation for  the  purchase  and  sale  of  agricultural  products.  This, 
like  the  central  bank,  has  for  members  associations  instead  of 
persons   and   does   a   wholesale  business   in  buying   and   selling 
agricultural  products.     (3)  The  Union  of  Cooperative  Societies, 
which    oversees   the   management  of    the   local    societies,   audits 
their  books,  furnishes  uniform  systems  of  bookkeeping  and  looks 
after  the  organizing  of  new  societies  and  does  the  propaganda 
work  in  promoting  agricultural  cooperative  work  in  the  province. 
In  order  to  become  a  member  of  the  Central  Bank  at  Halle 
the  local  association  or  bank  must  take  a  share  in  it  which  is  300 
marks.     The  number  of  shares  that  the  local  bank  or  associa- 
tion holds  is  in  proportion  to  the  amount  of  business  it  does.    By 
virtue  of  holding  shares  in  the  central  association  it  is  entitled 
to  make  loans  from  it.     The  farmer  goes  to  his  local  bank,  of 
which  he  is  a  member  and  to  whom  he  is  known,  and  makes  his 
application  for  a  loan.     The  bank  in  turn  applies  to  the  Central 
Association  with  which  it  has  credit  and  secures  the  money  and 
it  costs   the   farmer    Yz    per   cent  more   interest  than   the   local 
society  pays  the  Central  in  order  to  cover  the  local  costs  of  the 
society.      The    average    interest    rate    charged    by    the    Central 
Bank  in  1909  was  3.92  per  cent,  in   1910  it  was  4.34  per  cent 
and  in  191 1    was  4.39  per  cent.     The  rate  of   interest  paid  for 
deposits  is  3  to  3^^  per  cent,  depending  upon  the  current  interest 
rate. 

Credit  is  the  first  requisite  of  successful  cooperation.     When 


100  SELECTED   ARTICLES 

a  country  has  a  well-established  system  of  agricultural  credits  it 
is  almost  certain  to  be  thoroughly  organized  on  a  cooperative 
basis  in  other  lines.  This  is  the  case  in  the  province  of  Saxony, 
particularly  in  the  purchase  of  agricultural  supplies,  such  as 
fertilizers,  feeding  stuffs,  coal,  seeds  and  agricultural  machinery. 
The  local  banks  serve  the  farmers  both  as  the  societies  through 
which  the  purchases  are  made  and  furnish  the  credit  for  making 
the  purchases.  In  this  way  there  is  a  saving  in  the  cost  of  doing 
the  business  and  the  bank  knows  how  the  money  is   spent. 

Moral  Effect  of  Cooperation 

The  development  of  the  cooperative  credit  systems  among  the 
farmers  of  Europe  has  had  an  important  influence  on  their  social 
life.  Aside  from  the  independence  gained  in  their  business  affairs 
by  being  freed  from  the  money-lenders  which  for  the  most  part 
were  usurers ;  they  have  been  united  in  a  community  of  interest 
that  has  widened  their  circle  of  acquaintance,  given  them  a 
sympathetic  interest  in  each  other's  welfare  and  has  largely 
displaced  the  jealousy  so  commonly  existing  in  rural  com- 
munities. 

Among  the  peasant  classes  where  the  Raiffeissen  savings  and 
loan  banks  were  established  with  unlimited  liability  of  the  mem- 
bers, ministers  have  frequently  testified  that  they  have  been  as 
important  factors  in  the  moral  life  of  the  people  as  the  church 
itself.  Intemperance  and  immorality  is  not  permitted  among 
the  members.  If  a  farmer  takes  to  intemperate  drinking  his 
loan  is  called  in  by  the  bank.  If  he  is  neglecting  the  work  on 
his  farm  the  loan  is  called  in.  So  that  every  farmer  feels  he  is 
under  the  constant  watch  of  the  other  members  and  since  thev 
are  united  together  in  a  cooperative  association,  where  if  one 
man  fails  the  others  must  pay  his  losses,  they  are  all  interested 
in  each  other  and  anxious  to  see  every  one  succeed. 

The  application  of  the  cooperative  principle  of  "one  for  all 
and  all  for  one"  serves  as  an  incentive  to  the  individual  farmer 
and  inspires  him  to  do  his  best. 

Need  in  the  United  States 

The  farmers  of  the  United  States  as  yet  have  not  appreciated 
the  value  of  organizing  to  improve  their  credit.  In  the  southern 
states  the  cotton  crop  must  be  marketed  as  soon  as  harvested 


AGRICULTURAL   CREDIT  loi 

to  meet  outstanding  loans  that  the  farmers  have  made  at  ex- 
orbitant rates  of  interest.  The  grain  dealers  throughout  the 
central  states  know  that  they  will  be  flooded  with  wheat  and 
corn  just  before  tax-paying  time  by  farmers  who  are  compelled 
to  sell  in  order  to  raise  money  to  pay  taxes.  Intensive  systems 
of  farming  that  must  be  adopted  to  adjust  American  agriculture 
to  present  needs  means  a  larger  working  capital  for  the  farmer, 
he  must  use  more  labor,  more  commercial  fertilizers,  better  seed 
and  he  must  drain  his  land.  The  European  farmer  gets  twice 
as  large  a  crop  yield  per  acre  as  the  American  farmer  because  he 
spends  twice  as  much  capital  in  producing  it.  He  cultivates 
better,  fertilizes  better  and  he  takes  better  care  of  his  land. 

Interest  rates  in  general  are  lower  in  the  United  States  than 
they  are  in  Germany  and  yet  the  German  farmer  is  able  to  secure 
his  credit  through  his  cooperative  organizations  at  two  thirds 
the  rate  of  interest  ordinarily  paid  by  the  American  farmer.  In 
addition  the  loans  are  made  on  much  more  favorable  terms  and 
the  times  and  methods  of  repayment  are  adjusted  to  suit  the 
business  of  the  farmers. 

The  advantages  of  the  farmers  organizing  to  sell  their  credit 
for  what  it  is  worth  are  not  all  on  the  part  of  the  farmer.  But 
for  the  capitalist  seeking  a  safe  investment  for  his  money  they 
offer  a  security  that  can  be  bought  at  any  time  and  is  always 
negotiable.  Such  organizations  serve  as  an  economic  saving 
between  borrower  and  lender.  The  man  in  America  at  the 
present  time  who  wishes  to  invest  his  money  in  farm  mortgages 
must  seek  out  such  loans  personally  or  through  an  agent.  The 
punctuality  with  which  the  interest  will  be  paid  and  the  loan 
when  it  falls  due  will  depend  upon  the  personality  of  the  farmer. 
But  such  is  not  the  case  when  the  loans  are  made  through  a  land 
mortgage  association  and  the  investor  instead  of  lending  direct 
to  the  farmer  buys  the  bonds  of  the  association ;  he  then  knows 
that  his  interest  will  be  paid  as  punctually  as  on  a  government 
bond ;  that  his  security  has  a  market  value  and  can  be  sold  for 
cash  any  day  through  his  bank.  The  establishment  of  the  land 
mortgage  association  and  selling  its  bonds  on  the  open  market 
opens  up  a  field  for  investment  that  is  not  practically  closed  to 
a  large  class  of  investors. 

One  thing  to  be  emphasized  in  regard  to  the  success  of  the 
European  systems  is  the  fact  that  it  has  been  largely  due  to  the 


102  SELECTED  ARTICLES 

direct  oversight  that  the  governments  have  had  over  them.  With- 
out this  government  relationship  they  could  not  have  commanded 
the  confidence  of  the  public  that  they  have.  It  is  hopeless  to 
expect  an  equal  degree  of  success  for  similar  institutions  in 
America  unless  they  are  also  organized  under  government  con- 
trol, at  least  to  the  extent  that  the  public  will  have  absolute  con- 
fidence in  their  solvency. 


Annals  of  the  American  Academy.     46:  167-77.     March,  1913. 

Scientific  Farming  and  Scientific  Financing. 

Leonard  G.  Robinson. 

The  complaint  is  general  that  American  agriculture  has  not 
kept  pace  with  the  growth  of  population,  that  its  progress  has  not 
been  commensurate  with  industrial  progress,  and  that  the  phe- 
nomenal growth  of  the  city  has  frequently  been  achieved  at  the 
expense  of  the  country.  The  fact  is,  enthusiastic  back-to-the-soil- 
ers  notwithstanding,  that  farming  has  its  drawbacks.  This  is 
not  peculiar  to  the  United  States.  In  1897,  according  to  Mulhall, 
I  forty  per  cent  of  the  world's  population  was  engaged  in  agri- 
;'  culture  and  thirty-one  per  cent  of  the  world's  capital  was  em- 
;  ployed  in  it  but  its  share  of  the  world's  profits  was  only  twenty 
per  cent.  To-day  with  the  large  increase  in  land  values  and 
farm  equipment,  the  disparity  should  be  greater  if  anything. 
The  question  why  farming  is  not  as  profitable,  nor  as  attractive 
in  other  respects,  as  it  should  be,  is  variously  answered,  de- 
pending upon  the  point  of  view.  The  railroad,  the  middeman, 
society,  the  government,  the  farmer,  each  receives  a  share  of 
the  blame;  the  farmer  a  little  more  than  his  share. 

Doubtless  our  rural  transportation  facilities  are  far  from  the 
best.  The  wide  divergence  in  the  price  of  farm  products  between 
producer  and  consumer  is  also  indisputable.  It  must  further  be 
admitted  that  the  farmer  himself  has  displayed  a  woeful  want  of 
progressiveness  and  has  not  readily  responded  to  the  best  thought 
dealing  with  life  on  the  farm.  But  all  this  is  not  enough  to  ac- 
count for  the  bankruptcy  of  country  life.  The  cause  is  more 
insidious  and  more  deep  seated. 

But  for  the  fact  that  it  is  frequently  disregarded  or  treated 


AGRICULTURAL   CREDIT  103 

as  of  secondary  importance,  it  would  seem  superfluous  to  say  that 
capital  is  needed  in  farming  as  it  is  in  any  industrial  enterprise. 
To  farm  properly  and  profitably — scientifically,  if  you  will — the 
land  must  be  improved  and  brought  to  a  high  state  of  produc- 
tiveness ;  buildings  should  be  ample  and  in  good  repair ;  and 
equipment  modern  and  adequate.  All  this  apart  from  the  initial 
investment  in  the  farm.  In  addition  the  farmer  must  have  money 
to  put  in  his  crop ;  to  live  till  the  crop  matures ;  to  harvest  it ; 
to  market  it.  Granting  that  his  crop  is  good,  in  what  position 
is  he  to  market  it  advantageously  if  he  is  obliged  to  sell  to  his 
creditors,  as  the  case  very  often  is,  or  compelled  to  sacrifice  it 
in  order  to  meet  his  urgent  debts?  Again,  even  with  fair  prices, 
how  is  the  farmer  to  make  a  profit  on  his  operations  if  he  pays 
all  kinds  of  prices  for  his  capital?  Does  it  not  seem  a  little 
unreasonable  to  presume  that  agriculture  can  thrive  under  con- 
ditions that  would  wipe  our  railroads  off  the  map,  shut  the  doors 
of  our  factories,  and  paralyze  all  legitimate  commercial  activity? 
What  farming  really  needs  is  not  so  much  scientific  farming  as 
scientific  financing. 

The  lack  of  an  adequate  system  of  agricultural  credit  is  set 
down  by  President  Roosevelt's  Country  Life  Commission,  as  one 
of  the  most  prominent  deficiencies  of  country  life.  "The  present 
banking  system"  says  the  Commission's  report,  "tends  to  take 
the  money  out  of  the  open  country  and  to  loan  it  in  town  or  to 
town-centered  interests."  Once  a  year,  it  is  true,  Wall  Street  is 
thrown  into  a  financial  fever  over  the  shipment  of  money  to  the 
interior  for  "crop  moving,"  but  this  seasonal  inflow  of  funds  has 
little,  if  any,  eff'ect  on  the  rural  credit  situation.  To  begin  with, 
the  money  comes  the  wrong  time  of  the  year.  Instead  of  being 
available  in  the  spring  when  the  farmer  could  put  it  to  profitable 
use,  he  gets  the  money  in  the  fall,  just  in  time  to  pay  the  debts  he 
contracted  at  the  beginning  of  the  season  at  ruinous  rates.  In 
any  event,  the  money  remains  in  the  interior  but  a  month  or  two 
and  soon  finds  its  way  back  into  the  vaults  of  the  city  banks. 

How  the  migratory  tendency  of  money  toward  the  city  is 
abetted  by  our  national  banking  system  was  demonstrated  at  a 
recent  hearing  before  the  Congressional  Committee  on  Banking 
and  Currency.  It  was  shown  that  out  of  $10,662,564.78  on  deposit 
in  forty  national  banks,  in  one  congressional  district  in  Minnesota, 
$6,446,715.01  was  in  time  deposits  not  subject  to  check.   As  these 


104  SELECTED   ARTICLES 

banks  are  not  permitted  to  make  mortgage  loans,  a  good  part  of 
this  money,  if  not  idle,  has  in  all  probability  gone  to  the  reserve 
cities  to  be  loaned  out  on  call  at  two  per  cent  or  thereabouts,  while 
the  farmers  in  that  district  must  do  as  best  they  can  without  their 
much-needed  funds.  The  same  is  no  doubt  true  of  most  every 
part  of  the  country. 

Because  of  the  further  tendency  for  capital  to  seek  invest- 
ment in  industrial  and  commercial  enterprises  rather  than  on  the 
farm,  the  farmer  is  by  no  means  sure  to  get  his  fair  share  even 
of  the  loanable  funds  locally  available.  The  reason  is  not  far 
to  seek.  The  farmer  is  not  an  easy  customer  to  deal  with. 
His  methods  of  doing  business  are  a  little  primitive,  and  the 
distance  from  town  makes  proper  attention  to  farm  loans  in- 
convenient if  not  exceedingly  difficult.  Moreover,  the  farmer  and 
the  banker  have  little  opportunity  to  get  together.  They  do  not 
belong  to  the  same  church,  lodge,  club,  or  social  set.  Perhaps 
the  farmer  is  not  even  a  depositor.  He  is  not  influential  enough 
to  command  credit  and,  outside  of  the  righteousness  of  his  cause 
and  the  intrinsic  merit  of  the  security,  has  little  else  to  ofifer  for 
it.  It  is  easy  to  see,  therefore,  that  as  a  competitor  for  credit, 
the  farmer  is  not  an  unqualified  success. 

At  bankers'  conventions  it  has  been  customary  to  discuss  the 
relations  of  the  banker  and  the  farmer.  These  discussions  gen- 
erally end  in  talk.  Sometimes  not  even  in  that.  A  fair  sample 
of  the  interest  of  the  average  banker  in  the  farmer  was  shown  at 
the  Farmers'  Week  at  Ithaca  last  winter  held  under  the  auspices 
of  the  New  York  State  Agricultural  College.  The  program 
called  for  a  conference  of  country  bankers,  with  the  usual  dis- 
cussion as  to  how  the  country  banker  can  help  the  farmer. 
The  only  bankers  present  were  a  professor  at  the  college,  an 
editor  of  an  agricultural  paper,  and  the  writer. 

The  inherent  difficulty  lies  in  the  misconception  of  the  func- 
tions of  banking.  Banking  and  credit  are  not  synonymous. 
While  banks  do  a  credit  business,  the  ordinary  bank  cannot 
adequately  or  efficiently  fulfil  the  functions  of  a  credit  institu- 
tion. Viewed  in  the  light  of  a  purely  private  enterprise,  the 
interests  of  the  banker  and  of  the  farmer  are  not  always 
identical.  The  first  duty  of  a  bank  is  to  protect  its  creditors,  the 
depositors.  It  must  see  that  its  investments  are  safe  and  secure. 
That  done,  its  business  is  to  make  as  much  profit  as  possible  for 


AGRICULTURAL   CREDIT  105 

its  owners  or  stockliolders.  The  use  to  ^vhich  its  money  will  be 
put  by  tlie  borrower  is  of  minor  importance,  and  frequently  of 
no  importance  at  all.  The  banker's  chief  lookout  is  that  his 
money  is  not  idle  and  that  it  is  well  secured,  and  his  policy  is 
shaped,  as  a  rule,  by  other  considerations  than  the  legitimate 
needs  of  the  borrower  or  the  interests  of  the  community. 

That  our  banking  institutions  do  not  satisfy  the  legitimate 
needs  of  the  farmer  is  generally  admitted,  though  seldom  suf- 
ficiently emphasized.  The  effect  of  our  peculiar  banking  and 
currency  system  on  the  farmer  is  tersely  summed  up  by  Pro- 
fessor E.  W.  Kemmerer  in  the  American  Economic  Review  of 
December,  1912.  "Farming  business,"  he  says,  "is  pre-eminently 
seasonal  in  character;  the  farmers  over  the  greater  part  of  the 
country  need  funds  most  at  about  the  same  times  of  the  year, 
i.  e.,  the  fall  and  spring.  A  great  increase  in  the  demand  for 
currency  and  capital,  say  in  the  fall,  under  an  inelastic  currency 
and  credit  system  like  our  own,  means  to  the  farmer,  highest 
interest  rates  at  just  the  time  when  he  needs  most  to  borrow, 
greatest  scarcity  of  cash  at  just  the  time  when  his  need  for 
cash  is  the  most  urgent,  and  prices  depressed  by  a  tight  money 
market  at  the  time  of  the  year  when  he  has  most  to  sell." 

In  many  of  our  western  states  the  legal  and  prevailing  rate  of 
interest  is  twelve  per  cent,  not  reckoning  the  bonus,  commission, 
expenses,  and  other  subterfuges  invented  by  the  ingenious  money 
lender,  and  designed  to  circumvent  the  usury  laws  or  to  mollify 
the  public  conscience.  Conditions  in  the  East  are  no  better. 
Many  instances  have  been  brought  to  my  attention  in  New 
York,  New  Jersey,  Connecticut,  and  Massachusetts,  where  farm- 
ers have  been  paying  twenty-five  per  cent  and  more  for  accom- 
modations. There  are  localities  not  many  miles  from  New  York 
where  the  farmer  cannot  obtain  a  loan  on  a  gilt-edged  mortgage 
because  the  local  savings  banks,  "the  banks  of  the  people,"  find  it 
more  convenient  to  invest  in  the  bonds  of  the  Singapore  gas 
works  or  to  do  business  with  the  local  real  estate  operators. 

Continental  Europe  has  found  the  solution  of  this  problem, 
as  have  other  countries  outside  of  Europe,  in  the  creation  of 
banking  systems  specially  designed  to  answer  their  agricultural 
requirements.  The  one  underlying  principle  of  all  these  systems 
is  the  paramountcy  of  the  borrower's  interests  consistent  with 
sound  business  policy.     Another  noteworthy  feature  is  the  com- 


io6  SELECTED   ARTICLES 

plete  or  partial  separation  of  land  credit  and  agricultural  credit, 
so-called.  The  first  is  long-time  credit  secured  by  mortgage. 
The  second  is  short-time  credit,  and  the  promissory  note  is  ordi- 
narily the  sole  form  of  security.  The  distinction  is  important  as 
bearing  upon  the  development  of  credit  institutions.  Land  credit, 
being  more  or  less  impersonal,  permits  of  the  non-cooperative 
system  and  seems  to  find  it  preeminently  favorable  for  its  best 
development.  Short-time  credit,  on  the  other  hand,  is  in  its 
nature  personal  and  the  relationship  betwen  debtor  and  creditor 
more  intimate.  The  cooperative  system  has  therefore  been  found 
more  suitable  for  this  form  of  credit  and  has  been  almost  uni- 
versally adopted,  with  such  modifications,  however,  as  the  tra- 
ditions, the  temperament,  and  the  needs  of  the  individual  country 
demanded. 

The  oldest  land  credit  institutions  extant  are  the  German 
Landscliaftcn.  They  are  the  creation  of  Frederick  the  Great, 
who  decreed  the  compulsory  association  of  the  noble  land  owners 
for  cooperative  credit.  The  first  Landschaft  was  organized  in 
1769.  A  distinctive  feature  of  these  associations  is  that  they 
loan  not  money,  but  credit.  They  issue  bonds  to  the  borrowing 
member  for  the  amount  of  his  loan,  which  may  be  as  much,  as 
two-thirds  of  the  value  of  his  land,  and  he  sells  these  bonds 
either  in  the  open  market  or  to  banks  specially  organized  for 
the  purpose.  No  loan  can  be  refused  to  a  member,  and  its 
repayment  depends  entirely  upon  the  pleasure  of  the  borrower. 
The  interest  rate  on  these  bonds  rarely  exceeds  four  per  cent. 
The  only  charge  to  the  borrower  is  a  premium  of  one-half  to  one 
per  cent  to  defray  administrative  expenses. 

The  Landschaften  now  number  eighteen.  A  fair  idea  of  the 
magnitude  of  their  operations  can  be  gained  from  the  fact  that 
in  1906  their  outstanding  bonds  amounted  to  over  nine  hundred 
million  dollars.  These  bonds  sell  on  the  basis  of  three  and  a 
half  per  cent  and  lower,  which  is  proof  of  their  popularity  with 
the  investing  public.  Strangely  enough,  this  system  of  land 
credit  does  not  appear  to  have  met  with  favor  outside  of  Ger- 
many and  has  remained  exclusively  a  German  institution.  It 
seems  possible  that  its  aristocratic  lineage  and  the  traces  it  bears 
of  German  feudalism  have  militated  against  a  more  general 
adoption  of  the  Landschaft  system. 

Probably  the  best  type  of  non-cooperative  land  credit  insti- 


AGRICULTURAL   CREDIT  107 

tution  is  the  Credit  Fonder.  This  bank,  which  has  virtually  a 
government  monopoly  of  land  credit  in  France,  was  organized 
in  1852.  It  is  a  limited  liability  company  with  a  capital  of  two 
himdred  million  francs  and  with  the  right  to  issue  bonds  to  the 
extent  of  its  loans.  It  loans  on  mortgage  up  to  fift}^  per  cent  of 
the  land  value.  The  interest  rate  is  fixed  at  four  per  cent  a  year 
and,  by  means  of  an  ingenious  amortization  plan,  the  payment  of 
a  small  additional  percentage  extinguishes  the  entire  indebted- 
ness after  a  period  of  years.  Outside  of  the  loans  to  communes 
and  municipalities,  the  Credit  Foncier  in  1910  granted  6,595 
mortgage  loans  aggregating  142,911,556.79  francs,  and  its  bonds 
in  circulation  at  the  close  of  the  year  aggregated  a  total  of 
2,279,530,950  francs.  Notwithstanding  the  extremely  low  interest 
rate,  the  Credit  Foncier  is  a  paying  institution.  In  the  year  above 
mentioned  it  declared  a  dividend  of  6.4  per  cent  on  its  large 
capitalization  besides  putting  five  per  cent  of  the  net  profits  into 
the  reserve  fund.  It  is  inconceivable  that  American  financiers 
should  have  overlooked  so  fruitful  a  field  for  investment  and  so 
excellent  an  opportunity  for  signal  public  service. 

However,  it  is  cooperative  agricultural  credit  as  typified  by 
the  Raiffeisen  system,  and  in  a  lesser  degree  by  the  Schuhe- 
Delitssch  system,  that  has  exercised  the  most  potent  influence 
in  the  regeneration  of  agriculture  the  world  over. 

In  1849  Frederick  William  Raiffeisen  conceived  the  very  un- 
orthodox idea  that  the  real  capitalists  were  the  masses  and  that 
the  bankers  and  big  financiers  were  only  capitalists  by  sufferance. 
He  concluded  that  the  masses  could  supply  their  own  credit  re- 
quirements, provided  a  workable  plan  could  be  devised  to  bring 
the  lender  and  the  borrower  together.  Inspired,  no  doubt,  by 
the  wonderful  success  of  the  Landschaften,  he  resolved  to  adapt 
the  principles  of  cooperative  credit  to  the  needs  of  the  poorer 
class  of  farmers. 

But  the  peasants  had  not  the  wealth  of  the  large  land  owners. 
Here  is  where  Raiffeisen  was  guilty  of  another  heresy.  Credit, 
to  him,  signified  faith.  He  believed  that  the  average  man  was 
honest  and  that  communities  were  dependably  so.  He,  there- 
fore, felt  that  he  could  command  the  required  capital  by  "capi- 
talizing the  people's  honesty."  Accordingly,  with  little  money 
but  with  unlimited  faith,  the  first  Raiffeisen  bank  was  organized. 

The  principle  upon  which  cooperative  credit  rests  is  mutual 


io8  SELECTED   ARTICLES 

responsibility.  But  where  the  merit  of  the  borrower  rather  than 
the  security  is  the  primary  consideration,  qualified  responsibility 
is  not  sufficient  to  inspire  public  confidence.  Absolute  and  un- 
limited liability  of  the  members  has  therefore  been  adopted  as 
one  of  the  fundamentals  of  the  Raiffeisen  system.  Such  respon- 
sibility is  feasible  only  where  the  relationship  between  the  mem- 
bers is  close  and  intimate,  their  knowledge  of  one  another's 
character  and  needs  adequate  and  complete,  and  they  are  in  a 
position  to  see  that  the  borrower  makes  proper  use  of  the  loan 
and  to  discover  any  disposition  on  his  part  to  treat  his  obliga- 
tions lightly.  These  conditions  are  to  be  found  only  in  associ- 
ations whose  membership  is  small  and  whose  operations  are 
restricted  to  a  limited  area.  The  Raiffeisen  system  therefore  is 
the  system  par  excellence  of  the  small  local  bank. 

The  growth  ot  these  banks  has  been  stupendous.  In  1908 
Germany  alone  had  16,092  cooperative  credit  banks  of  various 
kinds  with  a  total  membership  of  2,202,950.  It  should  not  be 
assumed,  however,  that  they  had  easy  sailing.  Not  the  least  of 
the  numerous  obstacles  they  had  to  overcome  was  an  inimical 
and  harassing  government  bureaucracy.  Gradually  obstacles 
were  surmounted  and  obstructions  removed.  The  idea  of  co- 
operative credit  gained  headway  and  the  number  of  banks  in- 
creased with  great  rapidity.  Even  the  government  saw  its  error 
and  in  1895  established  a  bank  for  the  special  purpose  of  loaning 
them  money.  The  need  of  central  organizations  soon  became 
felt  and  resulted  in  the  organization  of  central  banks  to  act  as 
financial  clearing  houses  and  of  federations  to  act  as  moral  and 
educational  clearing  houses.  In  1909  the  National  Federation 
had  12,614  constituent  banks  with  a  membership  of  1,163,186. 
These  banks  loaned  out  during  that  year  a  total  of  $214,694,794. 
Their  working  capital  was  $461,089,632,  of  which  but  eleven  per 
cent  was  from  outside  sources,  the  balance  having  been  supplied 
by  their  members,  chiefly  in  the  form  of  deposits  which  amounted 
to  eighty-five  per  cent  of  the  working  capital. 

Cooperative  credit  as  an  institution  did  not  long  remain 
exclusively  German.  It  became  a  world  movement.  Italy  fol- 
lowed in  1883.  Austria  fell  into  line  in  1886,  Ireland  in  1895, 
and  France  in  1899.  Russia  has  its  cooperative  credit  banks ;  so 
has  India.  In  1909  Japan,  "the  Yankee  of  the  East,"  had  1,886 
cooperative   credit   associations    with   a   membership   of    167,760. 


AGRICULTURAL   CREDIT  109 

The  dominant  influence  of  cooperative  credit  in  the  world  of 
finance  is  evidenced  by  the  vastness  of  its  business  operations. 
It  was  estimated  that  the  outstanding  loans  of  a  more  or  less 
cooperative  character  in  continental  Europe  in  1897  aggregated 
a  total  of  $4,600,000,000. 

Singularly,  in  a  movement  of  such  world-wide  import,  the 
United  States  has  been  content  to  remain  a  passive  spectator. 
While  it  is  true  that  private  investors  and  our  existing  banking 
institutions  do  in  a  crude  way  supply  the  need  of  long-time  or 
mortgage  credit,  short-time  credit  is  virtually  non-existent,  and 
the  average  American  farmer  must  still  depend  for  his  annual 
working  capital  upon  the  generosity  of  his  neighbors,  the  for- 
bearance of  the  local  storekeeper,  or  the  cupidity  of  the  usurer. 

However,  both  land  credit  of  the  Credit  Fonder  type  and 
cooperative  agricultural  credit  of  the  Raiffeisen  type  have  found 
a  foothold  in  this  country,  although  in  a  very  limited  field.  The 
honor  of  introducing  these  two  systems  of  credit  into  the  United 
States  belongs  to  a  philanthropic  organization,  The  Jewish  Agri- 
cultural and  Industrial  Aid  Societj^  The  society  was  organized 
in  1900  with  the  object  of  assisting  Jewish  immigrants  in  the 
large  cities  to  go  into  farming.  Its  funds  are  derived  from  the 
large  fortune  bequeathed  to  charity  by  the  well-known  French 
philanthropist,  the  late  Baron  de  Hirsch.  It  is  a  New  York 
corporation  with  headquarters  in  New  York  City,  although  its 
operations  extend  to  nearly  every  state  in  the  Union.  The  so- 
ciety has  as  its  trustees  some  of  the  leading  American  Jews,  Mr. 
Jacob  H.  Schifif  being  one  of  its  incorporators. 

In  its  essentials  the  credit  system  of  The  Jewish  Agricultural 
Society  differs  little,  if  any,  from  that  of  the  Credit  Fonder 
and  other  agrarian  banks.  But  here  is  where  the  difference 
becomes  marked.  The  society's  funds  being  limited,  it  does  not 
as  a  rule  loan  where  the  funds  are  elsewhere  obtainable.  It 
rarely,  therefore,  makes  loans  on  first  mortgage.  Most  of  its 
loans  are  on  second  mortgage  and  not  a  few  on  third  and  even 
fourth  mortgages  supplemented  sometimes  by  chattel  mortgage 
or  other  collateral.  The  society  loans  up  to  seventy-five  per  cent 
of  the  value  of  the  land,  although  in  special  cases  it  has  loaned 
even  beyond  the  land  value.  During  the  last  twelve  years  it  has 
granted  2,178  loans  amounting  to  $1,256,114.05.  The  loans  aver- 
age around  five  hundred  dollars.     They  are  repayable  in  moder- 


no  SELECTED   ARTICLES 

ate  annual  instalments,  their  average  duration  being  about  ten 
years.  The  interest  charge  is  four  per  cent.  Considering  that 
the  security  taken  by  the  society  is  mainly  substandard,  it  speaks 
well  for  the  farmer  as  a  debtor  when  it  is  shown  that  the  repay- 
ments during  the  last  twelve  years  amounted  to  twenty-six  per 
cent  of  the  total  loaned  and  the  losses  less  than  three  per  cent. 

So  much  for  land  credit.  As  for  strictly  agricultural  or  short- 
time  credit,  while  the  society  felt  that  this  form  of  credit  was 
within  the  scope  of  its  work,  it  found  itself  unable  to  cope  with 
the  situation.  With  headquarters  in  New  York  and  a  clientele 
scattered  from  Maine  to  California,  the  society  could  not  keep 
in  sufficiently  close  touch  with  the  borrower  to  permit  of  its 
extending  personal  credit. 

To  obviate  these  difficulties  the  society  decided  iipon  the 
adoption  of  the  Raiffeisen  sj'stem  of  cooperative  credit.  In  igog 
it  set  about  to  organize  cooperative  agricultural  credit  associ- 
ations in  the  Jewish  farming  communities  in  which  it  was  inter- 
ested, although,  owing  to  legal  difficulties,  the  first  of  these 
organizations  did  not  come  into  existence  till  May  I,  igil. 

All  told,  the  Jewish  Agricultural  Society  organized  eight 
farmers'  credit  unions — four  in  New  York  and  four  in  Connecti- 
cut. Four  more  are  now  in  the  process  of  organization  in  other 
states.  Each  of  them  raised  five  hundred  dollars  through  the 
sale  of  shares  to  its  members  and  the  society  loaned  them  one 
thousand  dollars,  that  is,  two  dollars  for  every  dollar  of  their 
own.  These  loans  to  the  credit  unions  are  secured  by  promis- 
sory notes  bearing  interest  at  the  rate  of  two  per  cent.  Accord- 
ing to  their  reports  for  the  fiscal  year  ending  September  30,  1912, 
their  total  membership  numbers  240  and  their  outstanding  shares 
844,  making  a  total  capital  of  $4,220.  The  average  length  of  time 
they  have  been  doing  business  is  ten  months,  during  which 
period  they  granted  342  loans  aggregating  $23,375,  nearly  six 
times  their  share  capital.  Their  net  profits  for  the  period 
amounted  to  $425.88,  or  at  the  rate  of  more  than  eleven  per 
cent  per  annum  on  that  capital. 

As  stated,  these  credit  unions  are  modeled  very  much  after 
the  Raiffeisen  system.  Their  operations  are  confined  to  a  small 
area  and  membership  is  open  only  to  members  in  good  standing 
of  the  local  Jewish  farmers'  association,  which  is  itself  a  member 
of  the  central  organization — the  Federation  of  Jewish  Farmers  of 


AGRICULTURAL   CREDIT  in 

America.  The  credit  unions  are  highly  democratic  and  are  con- 
trolled entirely  by  the  members.  Shares  are  five  dollars  each 
and  every  member  has  the  same  rights  and  the  same  voice,  irre- 
spective of  the  number  of  shares  he  may  hold.  Loans  are 
granted  only  for  productive  purposes  or  urgent  needs.  They  are 
not  granted  for  a  period  exceeding  six  months  nor  for  an 
amount  over  one  hundred  dollars.  Interest  is  charged  at  the 
rate  of  six  per  cent,  and  the  security  required  of  the  borrower 
is  generally  a  promissory  note  with  one  or  more  responsible 
endorsements. 

While  it  may  be  a  httle  early  at  this  stage  for  these  pioneer 
credit  banks  on  American  soil  to  show  their  full  effect,  some  of 
the  results  of  an  adequate  system  of  cooperative  credit  have 
already  manifested  themselves  in  the  communities  in  which  they 
exist.  The  farmer  finds  no  difficulty  in  obtaining  a  moderate 
loan  for  productive  purposes  quickly  and  cheaply.  The  per- 
nicious activity  of  the  local  usurer  has  thus  been  largely  cur- 
tailed and  the  overbearance  of  the  local  storekeeper  is  in  evi- 
dence no  longer.  Not  the  least  important  is  the  moral  and 
educational  effect  of  these  associations.  The  credit  unions  have 
endowed  their  members  with  a  high  sense  of  mutual  responsibil- 
ity and  have  stimulated  them  to  further  effort  in  the  direction 
of  cooperation  and  mutual  self-help. 

What  is  needed  is  not  a  commission  of  study  but  one  of 
action.  W^e  have  learned  all  that  we  are  going  to  learn  of  the 
European  credit  systems  without  actually  putting  our  hands  to 
it.  To  my  mind,  in  order  to  establish  cooperative  credit  in  the 
United  States,  we  must  have  (i)  legislation  to  facilitate  the  in- 
corporation of  such  associations;  (2)  education  to  bring  to  the 
American  farmer  a  true  appreciation  of  the  benefits  of  such 
associations;  and  (3)  organization,  that  is,  leadership  to  perform 
the  actual  task  of  organizing  and  starting  these  associations. 

The  operations  of  these  banks  are  extremely  simple.  Any 
man  with  a  modicum  of  horse  sense  and  a  smattering  of  book- 
keeping is  quite  competent  to  take  charge  of  the  management  of 
a  cooperative  credit  bank.  The  business  of  a  credit  union  is  far 
less  intricate  than  the  daily  operations  of  the  average  farmer. 
What  the  European  and  Asiatic  ignorant  peasantry  have  done 
the  American  farmer  can  also  do.  Considering,  too,  what  has 
been  accomplished  abroad  by  the  various  land  banks  and  by  a 


112  SELECTED  ARTICLES 

philanthropic  organization  with  Hmitcd  means  here,  what  could 
not  an  American  land  bank,  commanding  the  confidence  and  the 
resources  of  the  entire  country,  accomplish? 

Meanwhile,  the  cry  of  "back  to  the  farm"  rings  hollow  when 
our  experienced  farmers  and  their  sons  are  compelled  to  abandon 
their  farms  because  they  are  denied  the  financial  facilities  to 
conduct  them  properly.  Let  us  not  blame  the  farmer  for  not 
getting  the  most  out  of  his  farming  operations  and  at  the  same 
time  withhold  from  him  the  only  means  that  makes  profitable 
farming  possible.  Just  a  little  scientific  financing  and  there  will 
be  little  to  worry  about  scientific  farming. 


Rogers,  A.  L.     Farm  Credits. 

Waterville,  Wash.,  April  19,  1913. 
Prof.  L.  L  Brislawn, 

Department  of  Economics,  Pullman  College,  Pullman,  Wash. 
Dear  Professor  :  I  have  filled  out  the  inclosed  questions  to 
the  best  of  my  ability  and  according  to  the  manner  in  which 
agricultural  credits  have  been  handled  in  this  section.  The  sys- 
tem has  been  changing  year  by  year  since  the  pioneer  days  of 
twenty-five  years  ago,  land  values  are  becoming  more  settled, 
the  possibilities  of  safe  farming  are  becoming  more  definite,  and 
therefore  interest  rates  are  gradually  getting  lower  as  the  specu- 
lative conditions  disappear.  This  is,  at  present,  a  one-crop  wheat 
producing  country;  one-half  the  land  is  summer  fallowed  each 
year;  consequently  there  Is  but  one  pay  daj^  each  year,  and  the 
farmer  gets  his  credits  on  that  basis.  The  whole  system  is  in- 
efficient and  uneconomic.  Very  few  of  them  have  made  much 
money  outside  of  the  raise  in  values  of  their  land.  They  are 
all  farming  on  too  big  a  scale.  Under  the  present  system  they 
are  destructive  as  hell  in  their  methods.  They  are  going  into 
debt,  buying  more  land,  gas-traction  engines,  and  lo-bottom 
plows.  No  rotation  or  diversification  of  crops,  just  wheat,  wheat, 
wheat;  simply  mining  the  soils  and  selling  the  surface  of  their 
farms.  The  greatest  trouble  with  the  average  farmer  is  he  is 
getting  too  much  credit ;  and  the  bankers  and  merchants  are  due 
some  consideration  and  also  some  condemnation  in  taking  long 
chances  in  their  desire  to  help  the  farmer  and  develop  the  coun- 


AGRICULTURAL   CREDIT  113 

try,  even  though  they  do  it  with  the  idea  of  making  a  profit. 
One  great  trouble  is  the  American  farmer  is  not  an  agriculturist, 
but  a  speculator  in  lands ;  he  values  the  soil  to  exploit  it,  and 
not  for  its  true  producing  qualities.  I  need  no  better  proof  of 
this  assertion  than  statistics  from  the  Middle  and  New  England 
states,  where  you  can  buy  farms  for  less  than  the  costs  of  im- 
provements on  them.  I  know  plenty  of  men  of  wealth  who 
would  be  glad  to  make  farm  loans  at  6  per  cent  on  25  or 
50  years'  time  under  the  amortization  plan  of  retiring  the 
principal  and  interest,  but  men  with  capital  hesitate  in  taking 
chances  on  the  ignorant,  shiftless,  and  speculative  methods  of  the 
average  American  farmer;  the  land  would  be  worn  out  before 
the  mortgage  became  due. 

There  is  an  immutable  law  in  loaning  money — the  greater  the 
risk  the  higher  the  rate — and  whenever  the  American  farmer 
quahfies  himself  and  his  conditions  the  same  as  the  German  and 
the  French  farmer  has  done,  he  will  get  just  as  good  accommo- 
dations, but  not  until  then.  Under  the  laws  of  compensation 
most  everyone  gets  what  is  coming  to  him.  The  rich  man  gets 
his  ice  in  the  summer  and  the  poor  man  gets  his  ice  in  the  winter, 
but  they  all  get  ice.  A  bunch  of  farmers  came  into  my  office  the 
other  day  kicking  on  the  rates  of  interest.  I  informed  them  that 
not  one  of  them  was  a  genuine  farmer ;  they  were  simply  specu- 
lators; they  demanded  loans  up  to  almost  the  actual  value  of  the 
land,  based  on  their  earning  capacity;  they  expected  to  scratch 
around  on  the  surface  of  the  ground  to  make  expenses  and  no 
improvements,  hoping  and  expecting  that  some  sucker  would 
come  along  in  a  year  or  two  and  give  them  twice  what  they 
paid  for  it.  The  money  loaner  expects  and  demands  the  highest 
rate  of  interest  he  can  write  when  he  goes  into  that  kind  of  a 
partnership.  I  further  informed  these  gentlemen  that  there 
would  some  day  be  an  agricultural  people  living  in  this  section 
who  would  be  entitled  to  a  very  low  rate  of  interest,  but  those 
people  would  not  come  to  the  market  in  an  automobile ;  they 
would  stick  to  the  dead-axle  wagon,  and  every  time  they  came  to 
town  it  would  be  loaded  with  something  to  sell,  and  when  they 
went  home  they  would  haul  back  a  load  of  manure  to  strengthen 
their  collateral,  so  that  their  land  would  be  worth  as  much  when 
the  mortgage  became  due  as  it  was  the  day  it  was  written,  and 
thereby  justify  a  demand  for  lower  rates  of  interest.     A  farmer, 


114  SELECTED   ARTICLES 

to  make  money,  has  got  to  learn  to  tote  both  ways,  but  the 
biggest  load  must  go  toward  the  market.  The  wheat  farmer 
works  hard  two  months  in  the  spring  and  two  months  in  the 
fall,  and  the  balance  of  the  time  he  sits  around  kicking  the 
grain  man,  the  transportation  man,  the  middle  man,  and  the 
banker,  when  he  should  be  milking  cows  and  feeding  hogs  and 
doing  diversified  farming,  thereby  maintaining  the  fertility  of 
the  soil  and  having  something  to  sell  when  he  comes  to  town  to 
buy  his  supplies.  The  silo  will  make  a  dairy  country  out  of 
eastern  Washington  and  double  the  values  and  producing  qualities 
of  the  land.  Some  of  the  farmers  are  waking  up  to  this  fact 
and  more  will  follow  later  on. 

Long-time  loans  secured  by  mortgages  on  land  should  not  be 
made  except  for  the  purchase  price  or  permanent  improvements 
on  same.  The  farmers  of  this  section  can,  at  all  times,  get  any 
reasonable  amount  on  their  lands  on  three  or  five  years'  time  at 
8  per.  cent,  with  a  privilege  of  paying  $ioo,  or  any  multiple 
thereof,  on  the  principal  at  any  interest-payment  period,  and  all 
papers  generally  become  due  in  the  fall,  after  harvest,  for  their 
convenience.     So  much  for  long-time  credits. 

Our  bankers  have  always  handled  the  farmers'  short-time 
loans,  and  every  deserving  man  has  had  all  he  required,  and 
the  rates  have  always  been  in  keeping  with  the  risk.  For  example, 
if  Bill  Jones  wanted  $200  June  i  to  pay  for  his  spring  work  he 
gave  his  note,  due  December  i,  at  12  per  cent.  On  September 
I,  if  he  wanted  $400  to  carry  him  through  harvest,  he  gave  his 
note,  due  December  i,  at  12  per  cent.  He  got  what  he  wanted 
when  he  wanted  it — all  he  needed — and  he  virtually  only  pays 
4  per  cent  per  annum  for  his  accommodations. 

Since  the  first  of  the  year  our  banks  have  reduced  the  interest 
rate  to  10  per  cent  on  short-time  loans. 

I  have  been  in  the  general  merchandise  business  for  over  a 
quarter  of  a  century,  and  I  know  the  eastern  Washington  farmer 
just  as  though  I  had  been  through  him  with  a  candle.  I  have 
let  him  get  into  debt  and  furnished  the  brains  to  get  him  out  of 
debt,  and  for  the  past  three  years  we  have  gone  into  practically 
a  cash  business.  We  did  this  as  much  for  the  sake  of  the  farmer 
as  for  our  own.  If  you  would  sit  down  with  the  average  farmer 
in  the  spring  and  figure  out  the  actual  amount  necessary  to  carry 
him  through  until  fall  and  say,  "Here,  Bill,  is  the  cash ;  you  take 


AGRICULTURAL   CREDIT  115 

it  and  pay  it  out  as  you  need  it,"  I  will  gamble  dollars  to  dough- 
nuts that  in  sixty  days  he  would  have  spent  it  all,  and  90  per 
cent  of  the  amount  would  be  invested  in  things  he  never  intended 
to  spend  it  for,  and  he  would  be  just  as  inconsiderate  in  paying 
it  back  promptly  when  due  as  he  was  in  spending  it,  and  that 
is  just  the  reason  Bill  has  to  pay  the  price  for  his  accommoda- 
tion. I  am  sick  and  tired  of  hearing  that  the  rich  are  getting 
richer,  and  the  poor  are  getting  poorer. 

It  is  up  to  the  individual  to  make  good.  There  is  an  un- 
written law  that  every  person  has  got  what  he  can  take  care  of, 
for  if  he  don't,  the  other  fellow  gets  it.  You  can't  mix  business 
and  philanthropy  and  have  the  balance  on  the  right  side  of  the 
ledger.  There  are  reasons  for  successes  and  there  are  also 
reasons  for  all  failures.  For  25  years  I  have  been  the  credit 
man  of  our  firm.  We  have  done  a  credit  business  of  from 
$75,000  to  $100,000  a  year.  We  never  lost  more  than  a  quarter 
of  I  per  cent  on  our  sales,  and  never  sued  but  three  men  in 
that  time.  They  say  extending  credit  is  a  science — it  may  be 
so,  but  the  whole  secret  of  success  in  that  line  is  simply  keeping 
each  individual  man  inside  his  earning  capacity.  One  man  will 
pay  you  $5  when  he  couldn't  pay  you  $10 ;  another  will  pay  you 
$10  when  he  couldn't  pay  you  $20 — and  so  on  up  as  high  as  the 
qualities  of  your  customer  will  permit  you  to  play  the  game. 
All  men  are  selfishly  honest  and  will  pay  under  the  ordinary 
stress  of  affairs.  When  a  banker,  merchant,  or  farmer  gets  a 
rating  of  AA  in  Bradstreet  it  means  he  has  a  record ;  he  has 
been  tested  by  fire,  as  it  were ;  that  he  would  put  his  family  on 
bread  and  water  rather  than  to  sacrifice  his  commercial  credit. 
That  man  has  honesty,  capacities  to  make  good,  and  ten  to  one, 
he  has  the  collateral.  He  can  get  anything  he  wants.  I  simply 
state  these  facts  to  show  you  that  you  can  not  handle  credits  in 
a  general  way.  Most  magazine  and  newspaper  writers  handle  the 
subject  of  credits  as  though  it  was  a  commodity  that  you  could 
shovel  into  a  wheelbarrow  or  haul  off  in  a  wagon. 

I  served  several  years  on  the  discount  committee  in  a  na- 
tional bank,  and  I  learned  that  when  a  man  presents  himself  at 
a  bank  wandow  asking  for  accommodations  he  must  have  the 
evidence  of  his  collateral,  his  credentials,  know  his  piece,  or 
pack  a  gun,  or  he  don't  get  any  money,  and  no  changes  in  the 
laws  will  ever  help  him  to  get  it  otherwise.     It  is  true  that  the 


Ii6  SELECTED  ARTICLES 

farmers'  paper  is  slow,  awfully  slow  sometimes.  He  can  find 
more  foolish  excuses  for  not  paying  when  due,  such  as  the 
bottom  fell  out  of  the  well,  the  chimney  fell  off  the  roof,  or  the 
bull  jumped  over  the  moon.  In  the  meantime  you  have  inter- 
mittent periods  of  night  sweats  through  the  fear  that  the  bank 
examiner  will  slip  around  and  catch  you  with  an  overstock  of 
musty  papers  (a  large  part  of  which  possibly  he  has  already 
hinted  you  had  better  place  in  the  morgue;  in  other  words, 
charge  off  to  profit-and-loss  account),  but  by  gathering  an 
increased  stock  of  patience,  much  solicitation,  and  prayer,  you 
drift  along  until  you  strike  a  bumper  crop  and  in  the  end  you 
generally  get  your  money.  One  of  the  best  and  most  prominent 
responsible  farmers  in  this  section  bought  an  automobile  and 
stood  me  off  two  years  on  a  $450  grocery  bill,  and  so  it  goes. 
But,  take  it  all  in  all,  the  farmer  is  as  good  a  risk  as  the  mer- 
chant, artisan,  and  other  classes,  and  is  entitled  to  as  good  a 
rate  as  anyone.  There  is  a  new  day  coming  for  the  agricul- 
turist; his  sons  and  daughters  are  awakening  to  the  call  of  the 
efficient  and  scientific  side  of  his  work.  The  whole  system  is 
being  made  over.  He  will  in  time  have  a  better  appreciation  of 
credits  and  will  make  better  use  of  them  when  he  gets  them, 
but  it  is  up  to  him  as  an  individual  to  make  good  and  thereby 
establish  a  community  standard  for  general  lower  rates  and 
wider  extended  credits,  and  I  would  further  remark  that  the 
farming  classes  should  pick  the  mote  out  of  their  own  eyes  and 
study  the  scientific  and  efficient  side  of  their  great  calling  before 
they  criticize  too  deeply  the  business  and  professions  of  other 
classes. 

Please  excuse  this  hurried  jumble  of  facts.     The  question  of 
rural  credit  is  worthv  of  much  serious  consideration. 


Independent.     77:185-6.     February    9,    1914. 

Rural  Credit  and  Farm-Land  Banks. 

Mr.  Roosevelt,  in  writing  the  introduction  to  the  report  of  the 
Commission  on  Country  Life,  which  he  had  appointed  while 
President,  stated  afresh  an  important  truth :  "We  were  founded 
as  a  nation  of  farmers,  and  in  spite  of  the  great  growth  of  our 
industrial  life  it  still  remains  true  that  our  whole  sj'stem  rests 


AGRICULTURAL   CREDIT  117 

upon  the  farm,  that  the  welfare  of  the  whole  community  depends 
upon  the  welfare  of  the  farmer.  The  strengthening  of  country 
life  is  the  strengthening  of  the  whole  nation." 

Several  weeks  ago  we  pointed  out  one  direction  in  which 
the  farmer  should  be  encouraged  to  work  for  the  strengthening 
of  his  economic  status  and  hence  for  the  enhancement  of  the 
general  welfare.  A  great  deal  has  already  been  done  to  make 
agriculture  a  science ;  the  next  thing  to  be  done  is  to  make 
farming  a  profession. 

There  is  one  other  vital  particular  in  which  the  conditions  of 
the  farming  industry  need  radical  improvement.  We  must  radi- 
cally modify  the  methods  by  which  the  farmer  can  make  use  of 
his  credit  in  the  improvement  and  development  of  his  farm. 

The  subject  of  rural  credit  is  one  of  vital  importance  to  the 
continued  and  increasing  welfare  of  our  country.  There  are 
twelve  million  farmers  in  the  United  States.  They  add  each 
year  to  the  national  wealth  nearly  eight  and  a  half  billion  dol- 
lars. Their  indebtedness  is  approximately  six  billion  dollars,  on 
which  the  annual  interest  charge  is  over  five  hundred  miUion 
dollars.  The  farmer  pays  an  average  interest  rate  of  SYi  per 
cent,  a  considerably  higher  rate  than  is  paid  by  industrial  cor- 
porations, railroads  and  municipalities.  At  the  same  time  the 
security  which  the  farmer  is  able  to  offer  in  the  land  on  which 
he  raises  his  crops  is  quite  as  stable  as  that  offered  by  those 
corporations. 

The  farmer  needs  money  to  improve  his  property,  to  increase 
its  productive  power  and  to  carry  him  over  the  time  when  his 
crop  is  maturing.  He  has  abundant  credit  resources,  but  the 
methods  open  to  him  in  this  country  for  turning  his  credit  into 
cash  are  crude,  inequitable  and  costly.  The  farmer,  as  a  result, 
has  to  pay  too  much  for  his  money.  From  this  condition  the 
whole  country  suffers. 

Last  year  a  commission,  appointed  by  the  Southern  Com- 
mercial Congress  and  receiving  the  endorsement  of  the  United 
State  Senate,  made  a  study  of  the  systems  of  rural  credit  in 
operation  in  European  countries.  The  commission  has  not  yet 
made  its  formal  report,  but  a  bill  has  already  been  introduced 
in  Congress  by  its  chairman,  Senator  Fletcher  of  Florida,  for 
the  establishment  of  a  national  farm-land  bank  system. 

The  bill  provides  for  the  establishment  of  national  farm-land 


ii8  SELECTED   ARTICLES 

banks  of  two  kinds — joint  stock  banks  and  cooperative  banks. 
The  chief  distinguishing  characteristic  of  the  cooperative  bank  is 
that  all  its  patrons  share  in  its  profits  in  proportion  to  the 
amount  of  business  they  do  with  the  bank.  The  profits  of  the 
bank  are  apportioned  first  to  the  stockholders,  the  rate  of  divi- 
dend to  them  being  equal  to  the  prevailing  rate  of  interest  in 
the  community  (but  in  no  case  exceeding  the  legal  rate  of 
interest  in  the  state)  ;  and  second  to  the  patrons  of  the  bank. 

The  main  purpose  of  the  farm-land  bank  will  be  to  provide 
the  farmer  with  money  for  the  development  of  his  farm  prop- 
erties. It  will  loan  money  for  any  one  of  three  purposes :  To 
complete  the  purchase  of  a  farm ;  to  improve  and  equip  the 
farm ;  and  to  pay  off  a  mortgage  on  the  farm.  The  loans  are  to 
be  made  for  not  more  than  thirty-five  years,  at  a  rate  of  interest 
exactly  i  per  cent  higher  than  the  rate  at  which  the  bank  can 
get  the  money  in  the  money  market ;  secured  by  a  first  mortgage 
on  the  farm  property;  with  a  compulsory  provision  for  the  re- 
payment of  the  principal  of  the  loan  in  annual  or  semi-annual 
instalments.  Loans  are  to  be  made  only  on  land  within  the 
state  in  which  the  bank  is  situated. 

The  money  which  the  bank  lends  is  to  be  obtained  in  three 
ways :  From  its  capital  and  accumulated  surplus,  from  deposit.s, 
including  deposits  of  postal  savings  funds,  of  which  the  farm- 
land bank  may  be  made  a  depository,  and  from  the  sale  of 
national  land-bank  bonds.  These  bonds  are  to  be  secured  by 
the  mortgages  given  by  the  farmers  as  security  for  the  loans  to 
them. 

The  farm-land  bank  will  make  the  credit  of  the  farmer  more 
available  by  bringing  him  into  touch  with  the  money  market  as 
he  never  could  come  into  touch  with  it  unassisted.  It  will 
strengthen  his  credit  by  combining  it  with  that  of  the  other 
landowners  of  his  neighborhood — for  the  underlying  security  of 
a  series  of  land-bank  bonds  will  naturally  comprize  a  group  of 
mortgages  on  many  different  properties.  It  will  insure  to  him  a 
lower  rate  of  interest  than  he  would  be  likely  to  obtain  any- 
where else,  for  the  bank  can  charge  only  i  per  cent  more  than 
the  bonds  sell  for,  and  bonds  based  on  such  excellent  security 
ought  to  be  salable  at  a  decidedly  lower  rate  of  interest  than  is 
necessary  for  the  usual   farm  mortgage. 

The  plan  proposed  in  the  Fletcher  bill  is  modeled  upon  the 


AGRICULTURAL   CREDIT  119 

cooperative  farm  banks  which  have  been  in  successful  operation 
in  Europe  for  many  years.  It  seems  to  follow  more  closely  than 
any  other  the  plan  of  the  Landschaften  of  Germany.  The 
Landschaften  in  1909  issued  bonds  to  the  amount  of  over  $650. 
The  loans  are  repayable  almost  entirely  by  installment  pay- 
ments, tho  the  borrower  is  at  liberty  to  repay  in  whole  or  in 
part  whenever  he  pleases.  The  yearly  payments  which  the  bor- 
rower makes  to  the  Landscliaft,  known  as  annuities,  are  made 
up  of  four  parts,  interest,  and  contributions  to  a  sinking  fund,  a 
guaranty  fund,  and  an  expense  fund.  The  annuities  in  recent 
years  have  averaged  about  4  per  cent.  When  they  are  4  per 
cent  the  interest  would  be  3  per  cent,  sinking  fund  ^  of  i  per 
cent,  guaranty  fund  one-quarter  of  i  per  cent,  expense  fund  ^ 
of  I  per  cent.  These  figures  compare  favorably  with  the  aver- 
age cost  of  money  to  the  American  farmer,  cited  above,  of  8^2 
per  cent. 

The  Fletcher  bill  is  a  long  step  in  the  right  direction.  Whether 
in  all  its  details  it  is  as  good  as  it  can  be  made,  we  do  not  pre- 
tend to  say.  That  is  a  matter  for  experts  who  have  made  a 
careful  study  of  the  subject. 

But  in  view  of  the  tremendous  importance  of  the  improve- 
ment of  the  credit  facilities  of  the  American  farmer,  it  is  a 
measure  that  should  receive  the  most  serious  attention  of  Con- 
gress and  that  without  delay. 

It  will  throw  open  to  the  farmer  for  the  development  of  his 
plant  an  abundant  source  of  cheap  money. 

It  will  enable  him  to  use  the  credit  which  he  possesses  in 
abundant  measure,  but  which  under  present  conditions  he  can 
often  avail  himself  of  only  at  a  ruinous  cost. 

It  will  introduce  the  tremendously  valuable  principle  of  co- 
operation into  our  rural  life  at  a  vital  point. 

It  will  help  to  keep  the  money  which  the  farmer  makes  in 
the  regions  where  it  is  made  instead  of  encouraging  its  concen- 
tration in  the  big  financial  centers  as  is  so  largely  the  case  under 
our  present  system  or  lack  of  it.  The  provision  for  the  deposit 
of  postal  savings  funds  in  the  farm-land  banks  is  particularly 
well  adapted  to  secure  this  end. 

The  LTnited  States  has  long  been  far  behind  the  countries  of 
Europe  in  its  development  of  a  system  of  agricultural  credit. 
The  country  is    rapidly   awakening   to   its   lack  in   this    regard. 


120  SELECTED   ARTICLES 

The  national  platforms  of  the  three  great  political  parties  con- 
tained planks  calling  for  legislation  to  supply  the  need.  The 
farm-land  hank,  on  the  Fletcher  plan,  or  some  modification  of 
it,  should  speedily  become  a  part  of  our  national  banking  system. 


Sinclair,  John   F.     Co-operative  Credit. 
Chapter  IIL     Co-operative  Credit  in  the  United   States. 

In  striking  contrast  to  the  highly  perfected  systems  of  co- 
operative credit  associations  existing  in  Germany,  is  the  almost 
total  absence  of  such  organizations  in  this  country.  The  move- 
ment, however,  is  gaining  headway  here  and  we  may  look  for  its 
rapid  extension  in  the  near  future.  Only  one  state,  Massachu- 
setts, has  so  far  made  any  legal  provision  for  cooperative  banks. 

AlassacJiitsctfs  Co-operative  Banks 

Massachusetts  passed  an  act,  chapter  419  of  the  laws  of 
1909,  providing  for  the  establishment  of  cooperative  banks.  The 
character  and  powers  of  the  associations  organized  tmder  this 
act  are  as  follows : 

(i)  Seven  or  more  citizens  associated  by  written  agreement 
may,  with  the  consent  of  the  board  of  bank  incorporation,  organ- 
ize a  credit  imion. 

(a)  The  words  "credit  union"  cannot  be  used  by  any  other 
group  or  association. 

(2)  This  union  may  receive  the  savings  of  its  members  in 
payment  for  a  stock-interest  or  on  deposit;  may  lend  to  mem- 
bers at  reasonable  rates  of  interest  the  funds  so  accumulated; 
and  may  undertake  other  authorized  activities  within  its  province. 

(3)  Credit  unions  shall  be  subject  to  supervision  by  the 
board  of  bank  commissioners. 

(a)  No  deposits  can  be  received  unless  the  credit  unions' 
by-laws  have  been  approved  by  this  board. 

(4)  The  by-laws  shall  specify,  among  other  things,  the  con- 
ditions of  deposit,  the  duties  of  officers,  the  number  requisite  for 
a  quorum,  etc. 

(5)  Each  of  the  stockholders  has  one  vote.  Their  ultimate 
authority  in  the  management  of  the  association's  affairs  is  prac- 


AGRICULTURAL   CREDIT  121 

tically  complete.  They  may  decide  directly  any  question  of 
policy;  on  appeal  of  two  members  they  may,  by  majority  vote, 
reverse  decisions  of  the  credit  committee  or  board  of  directors. 

(6)  At  the  annual  meeting  the  members  elect  a  board  of  five 
or  more  directors;  a  credit  committee  of  three  or  more;  and  a 
supervisory  committee  of  three.  No  director  may  be  on  either 
of  these  committees. 

(7)  The  credit  committee  must  approve  every  loan  of  the 
association's  money.  Any  applicant  may  appeal  from  them  to 
the  board  of  directors. 

(8)  The  directors  exercise  general  management  subject 
to  review.  They  elect  the  officers  from  among  their  number,  a 
president,  vice-president,  clerk  and  treasurer.  They  may  also 
expel  any  member  for  due  cause  after  a  hearing,  in  which  case 
the  money  contributed  must  be  returned. 

(9)  The  supervising  committee  has  oversight  of  financial 
affairs  and,  in  addition,  may  review  acts  of  the  officers,  directors 
and  credit  committee.  My  majority  vote  they  may  call  a  stock- 
holders' meeting  to  review  any  official  act  or  revise  any  by-law. 
They  may  also,  by  unanimous  vote,  suspend  any  officer  or  mem- 
ber of  the  credit  committee,  being  required  in  the  latter  case  to 
call  a  meeting  of  the  society  within  seven  days  of  such  sus- 
pension. 

(10)  None  of  the  committee  members  or  directors  may  re- 
ceive compensation,  except  the  ofiicers. 

(11)  The  funds  of  the  association  must  be  either  loaned  to 
members  or  deposited  in  savings  banks  or  trust  companies  incor- 
porated under  the  Massachusetts  law,  or  in  national  banks 
located  within  the  state. 

(12)  Dividends  may  be  declared  by  the  directors  just  before 
the  annual  meeting.  But  before  taking  such  action,  they  must 
set  apart  20  per  cent  of  the  net  income  fund  against  contingencies 
or  losses  during  succeeding  years.  The  members  at  any  annual 
meeting  may  increase  the  proportion  of  earnings  to  be  held  back 
for  this  fund,  and  whenever  it  equals  or  exceeds  the  contributed 
capital  in  amount,  they  may  reduce  this  proportion. 

(13)  The  union  may  be  dissolved  at  any  meeting  especially 
called  for  the  purpose  and  attended  by  two-thirds  of  the  mem- 
bers, providing  the  directors  have  unanimously  recommended  it 
and  providing  also  that  not  more  than  ten  members  object  there- 


122  SELECTED    ARTICLES 

to,  either  in  person  or  in  writing.  In  the  event  of  dissolution,  a 
committee  of  three  shall  be  elected  to  liquidate  the  assets. 

(14)  Within  twenty  days  after  the  last  business  day  of 
October  in  each  year,  every  union  must  file  with  the  bank  com- 
missioner a  report  signed  by  the  president,  the  treasurer  and  a 
majority  of  the  supervisory  committee,  with  a  penalty  of  $5.00 
for  each  delinquent  day. 

In  commenting  on  this  minutely  detailed  law  the  bank  com- 
missioner, in  his  report  for  1910,  enumerates  as  the  salient  pur- 
poses and  essential  features  of  credit  banks  the  following : 

(i)  Reciprocity  among  the  members  and  a  mutual  concern 
for  the  common  welfare  of  all,  whether  borrowers  or  lenders. 

(2)  Equality  of  personal  influence  exerted  in  voting. 

(3)  Membership  easily  gained  and  democratic.  The  par 
Value  of  shares  should  be  small  (it  averages  about  $5.00),  in 
order  to  induce  membership.  Installment  payments  to  be 
allowed  where  they  constitute  any  great  encouragement. 

(4)  Protection  against  individual  disloyalty  by  restricting  the 
amount  any  one  member  may  deposit,  thus  insuring  against  tem- 
porary embarrassment  through  the  sudden  withdrawal  of  large 
sums. 

(5)  The  restriction  of  loans  to  strictly  remunerative  pur- 
poses, each  applicant  to  state  the  intended  use  of  his  proposed 
loan  and  measures  provided  whereby  it  may  be  determined 
whether  the  loan  is  actually  used  for  that  purpose. 

(6)  The  limiting  of  membership  in  any  one  society  to  those 
who  are  intimately  acquainted  with  each  other,  so  that  the  re- 
sponsibility of  each  may  be  well  understood. 

(7)  The  insistence  upon  sound  character  as  the  first  qualifica- 
tion for  membership.  The  recognition  of  integrity  and  personal 
industry  as  the  only  safe  and  lasting  basis  of  credit.  For  this 
reason,  personal  earning-power  rather  than  property  in  sight  may 
be  considered  in  passing  on  occasional  loans  where  the  tangible 
security  seems  insufficient,  especially  if  other  members  will  con- 
sent to  guarantee  repayment. 

(8)  Punctual  meeting  of  all  obligations  on  maturity  to  be 
systematically  required  of  all  members. 

However  accurate  the  foregoing  may  be  as  a  statement  of  the 
true  fundamentals  of  short-time  credit  societies,  it  seems  mani- 
fest that  the  Massachusetts  law  as  it  now  reads  is  needlessly 


AGRICULTURAL   CREDIT  123 

prescriptive  and  the  machiiur\  it  requires  excessively  cumber- 
some. Undoubtedly  it  embodies  the  fundamental  ideas  of  the 
Raiffeisen  system,  which  is  championed  by  the  Hon.  Alphonse 
Desjardins  of  Levis,  Quebec,  the  man  who  led  the  agitation 
resulting  in  the  passage  of  this  act.  But  that  his  original  criti- 
cism of  the  particular  form  of  the  act  did  not  prevail  seems 
evident  from  his  later  statement  to  the  present  author:  "I  am 
free  to  tell  you  that  it  does  not  realize  my  ideal,  in  that  it  is  too 
complicated  and  therefore  discouraging  for  the  poor  people 
seeking  incorporation." 

Quite  probably  this  is  one  important  reason  why  in  the  two 
years  between  the  passage  of  the  act  in  1909  and  October  31, 
191 T,  only  seventeen  credit  unions  were  organized;  reporting  on 
the  latter  date  1,623  members  and  total  assets  of  $27,038.35. 
Every  one  of  these  is  a  city  union,  no  beginning  having  been 
made  so  far  in  the  country  districts. 

Mention  must  be  made  of  one  credit  union  in  Manchester, 
N.  H.,  as  showing  the  possibility  of  operating  these  societies 
without  special  legislation.  This  union  also  is  the  fruit  of  Mr. 
Desjardins'  work,  being  organized  primarily  for  the  benefit  of 
French  workingmen. 

In  connection  with  the  absolute  lack  of  credit  unions  in  this 
country  it  is  interesting  to  note  that  although  the  United  States 
Department  of  Agriculture  issued  a  report  of  such  rural  asso- 
ciations in  1892,  it  has  since  that  time  done  nothing  to  encour- 
age their  establishment. 

Recentl}',  however,  certain  private  individuals  and  associ- 
ations have  given  this  subject  of  rural  credit  considerable  atten- 
tion. The  American  Bankers'  Association,  for  instance,  has 
recently  appointed  a  committee  to  study  the  subject.  Possibly 
the  inspiration  for  this  move  came  most  directly  from  Hon. 
Myron  T.  Herrick,  a  prominent  banker  and  ex-governor  of 
Ohio,  who  is  an  influential  member  of  this  committee. 

But  more  promising  of  concrete  results  was  the  Rural  Credit 
Conference,  called  together  recently  by  the  Southern  Commer- 
cial Congress.  This  was  held  at  Nashville,  Tenn.,  during  the 
first  week  in  April,  1912,  and  was  attended  by  men  from  twenty- 
seven  state.  Some  came  as  chosen  delegates,  others  on  their  own 
initiative;  but  all  classes  were  represented,  bankers,  economists, 
business  and  professional  men  and  farmers  from  far  and  near. 


124  SELECTED   ARTICLES 

Tlie  main  purpose  of  this  gathering  was  to  learn  of  the  Euro- 
pean experience  with  rural  credit.  The  central  figure  of  the 
meeting  was  the  Hon.  David  Lubin,  formerly  of  Sacramento, 
California,  but  now  American  representative  on  the  Interna- 
tional Institute  of  Agriculture,  in  Rome,  Italy.  In  his  opening 
address  he  explained  the  principle  underlying  all  forms  of  co- 
operative credit,  namely,  that  a  group  of  men  combining  to 
furnish  a  collective  guarantee  can  obtain  money  on  that  security 
at  lower  interest  cost  than  as  individuals. 

The  practical  result  of  the  meeting  was  the  decision  to  send 
a  committee,  including  two  delegates  from  each  state  in  the 
Union,  to  Europe  to  study  credit  methods  at  first  hand. 


Hearst's    Magazine.     23:417-25,     March,    1913. 

Ready  Money  for  the  Farmer.     Frank  Parker  Stockbridge. 

Now  for  the  first  time  we  Americans  are  beginning  to  learn 
something  of  the  business  of  farming. 

We've  learned  the  art  of  farming.  Every  important  technical 
improvement  in  agriculture  has  originated  in  the  United  States. 
American  plows  and  harvesters,  threshing-machines  and  tractors, 
tools  and  implements,  have  revolutionized  this  art. 

We  know  the  science  of  farming,  too.  In  the  Department  of 
Agricultural  and  the  state  agricultural  colleges  and  experiment 
stations,  thousands  of  trained  investigators  have  developed  agri- 
cultural science  until  to-day  there  is  more  accurate  and  useful 
knowledge  of  proper  and  profitable  farming  methods  available 
to  the  American  farmer,  without  cost,  than  there  ever  was  be- 
fore, here  or  anywhere  else,  since  time  began. 

We  have  more  available  agricultural  land  of  the  best  quality 
than  almost  any  other  nation  or  group  of  nations.  We  have  a 
higher  average  of  soil  fertility  than  Europe;  almost  as  much 
untilled,  virgin  soil  as  we  have  yet  put  under  the  plow.  And 
yet ■ 

The  cost  of  farm  products  to  the  consumer  is  increasing 
faster  in  America  than  anywhere  else  in  the  world.  And  in  spite 
of  this  the  profits  of  the  American  farmer  are  not  increasing 
except  in  a  few  favored  localities  and  are  diminishing  in  some 


AGRICULTURAL   CREDIT  125 

sections.  Germany  is  getting  crops  nearly  twice  as  large  as  we 
get  from  every  acre  of  land.  And  in  France  the  farmer  has  a 
surplus  to  invest  in  rentes,  even  though  the  people  pay  less  for 
their  food  than  we  do.  Little  Denmark's  two  and  one-half 
million  people  have  $250,000,000  in  their  savings  banks,  export 
$90,000,000  worth  of  butter,  eggs,  and  bacon  annually  and  have 
climbed,  in  less  than  a  century,  from  a  state  of  almost  destitution 
to  a  higher  average  of  prosperity  than  ever  before  existed  in  an 
entire  nation  in  all  history — and  all  from  farming. 

They  don't  know  any  more  about  the  science  of  farming  than 
we  do — these  European  farmers  who  make  profits  out  of  poor 
soil  and  low  prices.  They  are  no  more  skilful  in  the  art  of 
farming  than  we  are — they've  learned  most  of  that  from  us. 
What  they  do  know,  is  the  business  of  farming. 

Capital — which  means,  of  course,  credit — costs  the  American 
farmer  twice  what  his  European  competitor  has  to  pay  for  it. 
That  isn't  because  credit  is  more  expensive  here  than  abroad, 
for  American  business  men  other  than  farmers  can  obtain  all  the 
credit  they  need  as  cheaply  as  those  of  Europe.  It's  because  the 
middlemen  who  deal  in  credit — the  bankers — find  the  American 
farmer  an  "easy  mark"  and  profit  from  his  necessities,  while  our 
farmers  haven't  learned  enough  of  business  principles  to  realize 
that  they  can  control  the  credit  market,  through  cooperation, 
just  as  easily  as  they  now  control  the  lemon  market  or  the 
apple  market  and  could  control  the  fertilizer  market  if  they  set 
out  to  do  so. 

Cooperation — that's  the  trick. 

The  individual  farmer's  credit  isn't  any  better  in  Europe 
than  it  is  in  America.  But  the  combined  credit  of  any  group 
of  neighboring  farmers  anywhere  in  the  world  is  gilt-edged 
security  on  which  the  money  markets  of  the  world  will  lend 
almost  as  cheaply  as  on  government  bonds ! 

Herr  Frederick  William  Raiffeisen,  a  poor,  half-blind  burgo- 
master of  Weyerbusch,  conceived  this  simple,  elementary  prin- 
ciple of  finance  in  1849.  It  took  him  fourteen  years  to  gain  the 
confidence  of  enough  farmers  to  put  the  principle  into  practice. 
Then  the  first  "Raiffeisen  Bank"  was  started  at  Anhausen,  in  the 
Rhine  Valley.  To-day  the  words  "Raiffeisen"  and  "cheap  money 
for  the  farmers"  are  synonymous  wherever  the  business  of  farm- 
ing has  been  put  on  an  equal  financial  footing  with  other  busi- 


126  SELECTED  ARTICLES 

ness  enterprises — and  that  means  all  over  Europe,  the  more  civi- 
lized parts  of  Asia,  and  even  sections  of  Africa. 

A  Raiflfeisen  bank  is  a  simple  institution.  A  group  of  neigh- 
bors get  together,  agree  to  pool  their  credit  resources  without 
limit  and  so  jointly  borrow  money  which  the  association  in  turn 
lends  to  its  members  as  they  need  it.     That's  all. 

A  farmer  in  Westphalia,  for  instance,  loses  a  cow.  It  will 
take  $47  to  buy  another,  and  he  hasn't  the  $47.  His  neighbor  on 
the  east  has  a  sick  horse,  and  needs  $125,  of  which  he  has 
already  $25,  in  order  to  get  his  spring  plowing  done.  Another 
neighbor  is  $30  short  of  enough  to  pay  the  cost  of  seed  and 
labor  for  putting  an  additional  ten  acres  under  cultivation. 
Still  another  farmer,  living  a  couple  of  miles  down  the  road 
but  known  to  all  of  the  others,  wants  to  try  a  new  method  of 
subsoil  plowing  which  the  Imperial  Ministry  of  Agriculture  is 
recommending  for  a  certain  type  of  soil. 

The  first  man  calls  his  neighbors  together — this  is  happening 
in  Germany  almost  every  day.  They  bring  in  all  the  fi.rmers 
from  an  area  of  perhaps  five  miles  radius.  Each  has  or  antici- 
pates some  special  need  for  additional  capital — capital  that  will 
enable  them  to  increase  the  fertility  of  their  farms  and  the  value 
of  their  crops  and  so  repay  the  amount  required  and  leave  a  fair 
profit  from  its  use.  Every  one  of  them  could  and  would  in- 
crease the  output  and  profits  of  his  farm  and  grow  the  crops  best 
adapted  to  his  particular  conditions,  in  accordance  with  the 
latest  developments  in  agricultural  science  and  art,  if  he  had  the 
cash  capital  to  enable  him  to  do  so.  And  that  means :  prosperity 
for  the  farmer,  cheaper  food  for  the  people  of  the  towns,  stabil- 
ity and  growth  for  industry  and  commerce — based  on  the  in- 
creased buying  power  of  all  the  people — progress  and  happiness 
for  the  whole  nation. 

You  follow  the  sequence,  don't  you?  Very  well — let's  get 
back  to  our  Westphalian  farmers. 

They  meet,  and  decide  to  organize  a  Raiffeisen  bank.  One 
man  wants  to  get  money  with  which  to  buy  a  grade  boar,  and 
so  improve  the  quality  of  his  Westphalian  hams.  He  lives  six 
miles  down  the  road,  and  is  a  stranger  to  the  others. 

"You  can't  join,"  they  tell  him.  "This  bank  must  be  a  neigh- 
borhood affair,  for  how  could  we  feel  safe  in  lending  money  to 
those  whom  we  do  not  see  every  day?     Go  back  and   borrow 


AGRICULTURAL   CREDIT  127 

from  your  own  Raiffeisen  bank,  or  organize  one  if  there  is 
none  in  your  vicinity." 

That's  the  first  principle  of  cooperative  credit  banking  by  the 
Raiffeisen  plan — ever}'  member  must  be  knovi'n  to  all  the  other 
members,  for  each  member  is  pledging  his  own  credit,  without 
limit,  for  the  indebtedness  of  the  group. 

Each  member  of  the  new  banking  company  signs  a  pledge 
of  his  entire  resources  for  the  bank's  debts  when  he  subscribes 
for  his  shares.  Under  German  laws,  they  must  have  a  minimum 
share  capital  of  ten  marks  ($2.38)  per  member.  The  average 
for  all  Germany  is  nearly  twenty  marks  per  member,  and  that 
is  the  amount  our  Westphalian  farmers  put  in,  each  an  equal 
share,  until  the  92  of  them — all  the  farmers  in  this  particular 
valley — have  contributed  $4.76  each  to  make  a  total  banking  capi- 
tal of  $438. 

Nothing  very  big  about  that,  is  there?  How  are  they  going 
to  lend  Hans  $47  and  Fritz  $100,  and  supply  funds  for  all  the 
seeds  and  fertilizer  and  implements  and  other  things  for  which 
August  and  Otto  and  Wilhelm  and  the  rest  of  the  92  need 
mone}'? 

Wait  a  minute  and  you'll  see  what  cooperative  credit  can  do. 

They  file  their  articles  of  incorporation — a  simple  and  inex- 
pensive legal  process — and  in  a  few  days  their  charter  is  issued. 
Now  they  are  full-fledged  bankers,  entitled  to  deal  in  credit  just 
like  the  bankers  in  the  cities — with  these  exceptions :  they  may 
lend  only  to  their  own  members,  who  must  be  their  own  neigh- 
bors, and  they  may  lend  only  for  productive  purposes,  which 
must  be  stated  in  the  application  for  each  loan. 

They  elect  ofificers,  all  from  their  own  membership,  and  all 
without  salaries  except  the  cashier.  For  that  office  they  pick 
one  whose  farm  is  near  the  center  of  the  district,  for  there  is 
no  banking-house  to  be  built  or  rented — a  back  room  in  the 
cashier's  house  is  the  banking-office,  and  his  salary  of  ten  or 
twelve  marks  a  month  covers  the  rent. 

Now  the  applications  for  loans  come  in — many  times  the 
amount  of  the  new  bank's  capital.  Where  is  the  money  to  come 
from?  Out  of  hiding,  some  of  it,  for  as  soon  as  the  new  bank 
—their  oivn  bank— is  open  for  business,  the  thriftier  members 
uncover  their  little  hoards  and  deposit  them  to  draw  interest  and 
be  loaned  to  their  neighbors.     But  even  these  deposits  do  not 


128  SELECTED  ARTICLES 

provide  funds  for  all  the  would-be  borrowers.  Very  well,  the 
new  Raiffeisen  bank  gets  the  rest  of  the  money  it  needs  in  the 
open  money  market;  right  at  the  bank,  the  best  and  the  biggest 
bank  in  the  nearest  town  or  in  any  town  in  Germany.  Is  there 
a  bank  or  a  banker  anywhere  in  the  world  who  wouldn't  lend, 
to  the  limit  of  possible  demands,  on  the  security  of  a  note  backed 
by  the  combined  guarantee  of  the  farmers  of  an  entire  agricul- 
tural community,  every  one  of  them  pledging  all  his  individual 
resources  for  the  debts  of  the  group? 

Now  our  Westphalian  bank  is  in  full  swing.  Our  friend  who 
started  it  has  given  his  note,  payable  in  one  year,  for  $47,  with 
two  of  his  neighbors  as  indorsers,  and  can  buy  that  cow.  Fritz 
gets  his  $100  for  a  horse  on  a  ten-year-instalment  note.  Otto 
doesn't  have  to  give  indorsers,  because  everybody  in  the  valley 
knows  that  Otto's  word  is  as  good  as  a  mortgage.  Of  course, 
the  banker  in  town  wouldn't  know  that,  and  Otto  would  have 
to  give  a  mortgage  and  pay  6  or  7  or  8  per  cent  if  he  had  been 
able  to  borrow  from  the  town  bank  at  all,  which  is  unlikely. 
And  even  if  he  had  been  able  and  wanted  to  pay  back  the  loan 
before  it  was  due,  he  couldn't  have  done  so — the  banker  must 
have  his  interest  on  the  mortgage  for  the  full  term. 

Under  the  Raiffeisen  system,  if  Hans  wants  to  pay  back  that 
$47  at  the  end  of  a  month,  he  can  do  it — and  it  will  have  cost 
him  in  interest  17  cents!  If  he  keeps  it  three  months  it  costs 
him  50  cents;  $2  if  he  uses  it  for  a  whole  year.  And  that  is  all 
— no  notary's  fees,  no  fees  for  examining  title  or  recording  a 
mortgage,  no  bonus,  no  commissions,  none  of  the  subterfuges 
by  which  the  rural  American  usurer  evades  the  law  and  "soaks" 
the  farmer. 

If  Hans,  after  borrowing  the  $47,  should  decide  that,  instead 
of  buying  a  cow,  which  he  stated  as  his  purpose  when  he  ap- 
plied for  the  loan,  he  would  buy  a  new  stove  and  a  dress  for 
his  haiisfrau,  quick  would  be  the  penalty  imposed  by  the  neigh- 
borhood Raiffeisen  association — for  his  neighbors  would  know, 
of  course,  what  he  had  done  with  the  money.  Not  only  would 
he  be  required  to  pay  back  the  entire  amount  at  once,  if  he  had 
to  sell  another  cow  to  do  it,  but  he  would  be  expelled  from 
membership  in  the  bank.  So  Hans  takes  pains  not  to  borrow 
money  unnecessarily  and  to  spend  it  wisely  for  the  productive 
purposes  for  which  it  is  loaned. 


AGRICULTURAL   CREDIT  129 

There's  the  whole  secret  of  the  advantage  the  European 
farmer  has  over  the  American  farmer — the  Raif?eisen  bank. 
Viewed  by  itself,  a  single  Raiffeisen  bank  looks  like  a  trivial 
and  insignificant  institution.  They  average  only  about  $zj40  of 
paid-up  capital  and  ninety-two  members  each.  But  the  15,517 
of  them  existing  in  1910  had  over  $500,000,000  of  working  capital, 
with  which  they  made  $1,500,000,000  of  loans.  The  Raififeisen 
banks,  through  their  provincial  federations  and  general  banking 
centers  dealing  exclusively  with  them,  are  able  to  obtain  all  the 
capital  they  require  for  the  use  of  their  members  in  the  open 
money  market  in  competition  with  the  biggest  and  most  firmly- 
established  industrial  enterprises.  One  group  of  12,614  banks, 
belonging  to  the  National  Federation,  had  1,163,186  members  in 
1909.  The  total  business  done  by  this  group  in  the  course  of  a 
year  was  $1,061,568,167.08,  of  which  $214,694,794  was  in  loans 
granted  during  that  calendar  year.  More  than  28  per  cent  of 
all  the  loans  outstanding  were  current  account  loans,  payable  at 
any  time,  the  interest  ceasing  when  repayment  was  made,  and 
the  average  rate  of  the  interest  was  4.4  per  cent,  as  against  8.5 
per  cent  which  the  average  American  farmer  pays  when  he  is 
able  to  horrozv  at  all. 

You  see  clearly,  don't  you,  how  the  European  farmer  has, 
through  the  Raiffeisen  banks,  an  immense  advantage  over  the 
American  farmer  in  being  able  to  obtain  cheap  capital  for  cur- 
rent expenses  ?  I  shall  try  to  make  it  even  clearer  a  little  further 
along,  when  w^e  begin  to  consider  the  condition  the  American 
farmer  finds  himself  in,  but  first  let  me  tell  briefly  of  another 
great  advantage  in  obtaining  cheap  capital  for  permanent  im- 
provements. 

The  best  example  of  this  is  to  be  found  in  France — the 
Credit  Fonder.  From  this  national  institution,  financed  by  the 
French  people  and  the  great  bankers  of  Paris,  any  land  owner 
may  borrow  on  long  time,  at  low  interest,  with  principal  and 
interest  payable  in  instalments,  for  the  purpose  of  making  per- 
manent improvements  on  his  land — new  buildings,  ditching, 
tiling,  walls,  or  orchards — anything  that  will  increase  the  value 
of  the  property.  It  is  readily  seen  that  a  much  larger  loan  pro- 
portionate to  the  original  value  of  the  land  is  justified  under 
these  conditions  than  if,  for  instance,  the  farmer  were  mort- 
gaging his  place  to  buy  an  automobile.    The  bonds  of  the  Credit 


130  SELECTED   ARTICLES 

Fonder,  which  pay  3  per  cent  a  year,  are  eagerly  sought  as 
investments  for  savings  by  the  thrifty  French  people.  And  in 
Germany,  in  Denmark,  in  Belgium,  and  elsewhere  in  Europe, 
the  cooperative  idea  has  been  applied  to  this  problem  of  pro- 
viding cheap  capital  on  long-time  mortgages  for  permanent  im- 
provements. The  German  Landschaften  are  cooperative  associ- 
ations of  landowners,  lending  only  to  members  on  mortgages, 
which  usually  run  over  fifty  years  and  are  payable  in  small 
equal  yearly  instalments  which  eventually  amortize  the  principal 
while  absorbing  the  5  per  cent  interest.  The  Landschaften 
bonds  at  4  per  cent  sell  at  par  in  the  most  conservative  money 
markets  of  Germany,  and  there  is  never  the  slightest  difficulty  in 
obtaining  sufficient  funds  to  meet  all  borrowing  demands.  And 
as  a  result  of  the  ease  with  zvhich  permanent  capital  can  thus  he 
obtained,  the  farms  of  Germany  and  France  and  the  rest  of 
Europe  are  increasing  in  value  and  productivity  many  times  as 
rapidly  as  are  those  of  America. 

There  is  another  system  of  cooperative  credit  banking  in 
Germany,  the  Schulze-Delitzsch  banks,  nearly  1,000  of  them, 
organized  on  the  same  general  plan  as  the  Raiffeisen  banks,  but 
operating  principally  in  the  cities  and  towns.  They  have  an 
average  membership  of  639,  as  against  the  average  of  92  mem- 
bers in  each  Raiffeisen  bank.  Their  share  capital  is  larger  per 
member  and  they  carry  on  every  kind  of  banking  business.  Their 
primary  object  is,  however,  that  of  granting  loans  for  short 
periods  to  their  members.  In  1910  these  loans  amounted  to 
$1,000,000,000.  And  while  the  rate  of  interest  of  the  Schulze- 
Delitzsch  banks  is  a  trifle  higher  than  the  average  charged  by 
the  Raiffeisen  banks,  the  dividend  returns  to  members  out  of 
the  profits  are  larger,  so  that  the  farmers,  who  constitute  about 
26  per  cent  of  the  borrowers  from  the  Schulze-Delitzsch  banks, 
fare  equally  well  whichever  source  they  obtain  their  credit 
capital  from. 

Is  it  any  wonder,  then,  that  Europe  has  us  agriculturally 
beaten  to  the  traditional  frazzle?  That  Germany,  for  instance, 
produces  on  a  given  number  of  acres  $913,541,000  more  of  wheat, 
rye,  barley,  oats,  and  potatoes  than  the  United  States  does? 

It  isn't  because  they  know  more  of  the  science  of  farming 
than  we  know;  not  that  they  know  any  tricks  of  the  art  of  farm- 
ing that  we  don't  know,  but  simply  because  in  a  business  way 


AGRICULTURAL    CREDIT  131 

these   European    farmers   are   enabled   to    put   into  practice    the 
science  and  art  that  our  farmers  cannot  afford  to  apply. 

Consider,  for  a  moment,  what  the  American  farmer  is  up 
against.  All  American  banking  practice,  so  far  as  the  farmer 
is  concerned,  is  based  upon  the  idea  of  mortgage  security  and 
interest  over  a  period  of  years.  If  this  were  the  general  con- 
dition obtaining  throughout  all  business,  the  farmer  would  have 
less  ground  for  complaint.  But  while  the  farmers  of  America 
are  paying  $510,000,000  every  year  as  interest  on  $6,000,000,000 
of  money  borrowed  for  the  necessary  purposes  of  their  busi- 
ness— an  average  rate  of  8y>  per  cent  a  year  as  computed  by  Mr. 
B.  F.  Yoakum,  chairman  of  the  Frisco  Railroad — the  average 
rate  of  interest  on  short  time  loans  to  business  men  is  only  4. 11 
per  cent.  Your  average  business  man  can  take  his  six  months' 
commercial  paper  into  the  open  money  market  and  obtain  capital 
for  his  reasonable  business  needs  at  3.56  per  cent  a  year.  The 
stock  exchange  operator,  borrowing  $5,000  or  more  in  the  New 
York  "call  money"  market,  where  the  rate  of  interest  has  no 
legal  limit  but  the  blue  sky,  has  had  to  pay  an  average  rate  of 
only  2.46  per  cent  a  year  for  a  long  period  of  years. 

The  American  farmers'  burden  of  interest  amounts  to  five 
hundred  and  ten  million  dollars  a  year — practically  the  total 
value  of  the  nation's  wheat  crop — paid  by  the  farmer  for  the 
use  of  the  capital  required  in  his  business !  That  is  the  estimate 
of  Mr.  Yoakum,  based  on  carefully  gathered  information  and 
statistics.  Here  is  an  average  credit  of  $1,000  per  farmer  pay- 
ing an  average  rate  of  8^  per  cent  a  year — an  interest  charge 
that  means  that  if  every  farmer  who  raises  wheat  could  plow, 
SOU',  harvest,  and  market  that  wheat  entirely  without  expense  in 
time  or  money,  the  total  proceeds  of  the  whole  crop  would 
barely  pay  the  cost  of  the  credit  needed  for  the  operation  of  the 
farm ! 

The  gossips  in  any  country  village  will  tell  you  true  stories 
of  usury  and  ruin  until  your  heart  sickens.  I  know  one  little 
New  York  State  village  in  which  there  are  a  national  bank,  a 
state  bank,  a  private  bank,  and  about  a  dozen  retired  farmers 
who  do  not  call  themselves  bankers.  Every  one  of  these 
money-lenders  is  rich  and  getting  richer.  The  surrounding 
country  is  as  fertile,  prolific,  and  valuable  as  any  in  America, 
hut  the  farmers  are  getting  poorer  as  the  village  money-lenders 

10 


132  SELECTED   ARTICLES 

are  getting  richer.  The  farms  are,  one  by  one,  coming  into  the 
possession  of  the  bankers,  who  apparently  conduct  their  business 
with  the  end  of  eventually  getting  all  that  the  farmer  has.  Yet 
there  is  nothing  illegal  about  their  operations — and  what  is  the 
farmer  to  do?  He  can  take  his  choice — between  borrowing 
from  the  village  usurer  and  losing  his  farm  gradually,  or  trying 
to  operate  without  capital  and  losing  it  suddenly.  Anyone 
familiar  with  rural  conditions  will  tell  you  it  is  more  often  the 
case  than  not  that  the  farmer  has  to  sell  his  crop  to  his  creditors 
for  what  they  are  willing  to  give. 

Why  not  adopt  the  Raiffeisen  system  and  the  Landschaften 
idea  in  America,  then?  Wouldn't  they  work  here  as  well  as 
they  do  in  Europe?  The  answer  is,  that,  the  Raiffeisen  plan 
has  been  adopted  in  America  and  it  does  work. 

As  I  said  in  the  beginning  of  this  article,  we're  just  beginning 
to  learn  the  business  of  farming  in  America.  And  our  teachers 
in  this  branch  of  business  are  the  same  people  who  have  been 
our  best  teachers  in  many  other  lines  of  business — the  Jews. 
The  only  farmers  in  America  who  can  obtain  capital  for  the 
conduct  of  their  business,  on  terms  favorable  enough  to  compare 
with  the  low  cost  of  credit  to  the  European  farmer  or  the  city 
business  man,  arc  the  Jezvish  farmers  of  New  York,  Con- 
necticut and  New'  Jersey  zvho  are  members  of  the  only  co- 
operative agricultural  credit  associations  in  the  United  States. 

These  Jewish  farmers  can  obtain  capital  for  current  expenses 
at  a  cost  of  2  per  cent  a  year.  That  they  thus  have  a  tremen- 
dous advantage  over  the  average  American  farmer,  who  pays  8J^ 
per  cent  a  year  for  the  capital  he  needs,  requires  no  explanation 
or  demonstration.  Nor  is  this  advantage  due  to  any  racial  dif- 
ference, to  superior  agricultural  qualifications — to  anything,  in 
short,  except  the  one  fact  that  the  Jewish  farmers  in  America 
have  adapted  to  American  conditions  the  European  cooperative 
credit  system. 

Six  years  ago  Air.  Leonard  G.  Robinson,  general  manager  of 
the  Jewish  Agricultural  and  Industrial  Aid  Society  of  New 
York,  as  a  result  of  his  investigation  of  the  condition  of  the 
Jewish  farmer  in  America,  determined  that  the  most  helpful 
service  his  organization  could  render  would  be  to  promote 
among  the  farmers  of  his  race  the  establishment  of  cooperative 
credit  societies  modeled  on  the  European  plan. 


AGRICULTURAL   CREDIT  133 

"I  found  appalling  instances  of  usury  by  the  score,"  said 
Mr.  Robinson,  telling  me  how  the  idea  of  enabling  the  Jewish 
farmer  to  finance  himself  had  developed  in  his  mind.  "There 
seemed  to  be  no  limit  to  the  rapacity  of  the  average  rural 
banker.  I  found  as  high  as  300  per  cent  a  year  in  some  cases 
being  extorted  from  needy  farmers.  You  cannot  blame  the 
banker  entirely.  He  is  in  business  to  make  money — not  for  the 
promotion  of  agriculture.  It  is  only  recently  that  any  consider- 
able number  of  bankers  have  grasped  the  fundamental  truth  that 
whatever  stimulates  agricultural  development  at  once  reacts 
upon  general  business,  to  the  advantage  of  bankers,  manufactur- 
ers, and  merchants  alike. 

"I  became  convinced  through  my  investigations  that  the 
individual  farmer  can  never  compete  successfully  with  the  urban 
borrower  for  banking  credit.  The  business  man  is  where  the 
banker  can  watch  him,  can  measure  his  character  and  his  ability 
and  estimate  his  profits.  The  "farmer  is  isolated,  out  of  touch 
most  of  the  time  with  the  banker.  Anything  might  happen  on 
the  farm,  and  the  money-lender  would  not  know  of  it  until  too 
late  to  protect  his  loan.  It  is  only  good  business,  therefore,  that 
the  banker  should  discriminate  against  the  individual  farmer  and 
demand  from  him  better  security  and  higher  interest." 

Some  four  thousand  Jewish  farmers  Mr.  Robinson  and  his 
society  had  found  in  the  East — four  groups  of  them  in  New 
York,  four  more  in  Connecticut,  two  or  three  in  New  Jersey. 
Not  especially  good  farmers  any  of  them;  not  particularly  bad 
farmers ;  none  of  them  wealthy  and  a  few  unable  to  make  ends 
meet — in  short,  about  like  other  American  farmers  in  intelli- 
gence, industry,  and  agricultural  ability. 

In  1909,  after  two  years  of  urgent  solicitation  on  Mr.  Robin- 
son's part,  the  directors  of  the  Jewish  Agricultural  and  Industrial 
Aid  Society  authorized  the  organization  of  cooperative  credit 
unions  on  the  Raiffeisen  plan  wherever  a  colony  of  Jewish  farm- 
ers was  to  be  found.  Two  years  later.  May  i,  191 1,  the  first 
prototype  on  American  soil  of  the  German  Raiffeisen  Bank  was 
organized  through  Mr.  Robinson's  initiative. 

Three  cooperative  credit  unions  were  first  organized,  one  in 
Rensselaer  County,  New  York,  and  the  two  others  in  Fairfield 
County,  and  at  Ellington,  Connecticut.  Shares  in  these  associ- 
ations were  sold  at  $5  each.    The  New  York  State  Union  had 


134  SELECTED   ARTICLES 

32  members  who  took  96  shares — an  average  investment  of  $15 
per  member.  In  the  first  16  months  of  its  existence  this  par- 
ticular association  had  made  52  short-term  loans  to  its  members, 
amounting  to  $3,025 — an  average  of  $58.17  per  loan,  of  which 
$1,635  had  been  repaid.  On  its  own  credit,  representing  as  it 
does  the  combined  credit  of  its  farm  members,  this  Rensselaer 
County  association,  like  the  others  established  by  Mr.  Robinson, 
is  able  to  borrow  through  existing  financial  channels  all  that  it 
needs  to  lend  to  its  members. 

And  they  pay  2  per  cent  interest! 

It  does  not  takfe  any  great  stretch  of  the  imagination  to  see 
the  advantage  these  Jewish  farmers  have  over  American  farm- 
ers generally.  It  means,  clearly,  that  the  Jewish  farmer  is  in 
a  position  to  apply  whatever  knowledge  and  skill  the  develop- 
ment of  agricultural  science  and  art  may  oflfer,  whenever  he 
desires  to  do  so.  It  means  that  he  can  increase  the  productivity 
of  his  farm  as  rapidly  as  existing  agricultural  knowledge  and 
his  own  industry  enable  him  to  do  so.  And  that  is  just  what 
the  American  farmer  cannot  do  and  ought  not  to  be  expected 
to  do  under  existing  agricultural  financial  conditions. 

What  these  Jews  have  done  is,  as  I  have  already  said,  to 
begin  to  teach  the  American  farmer  the  business  of  farming. 
The  great  business  teachers  of  the  world  have  had  to  point  the 
way  in  this  as  in  other  lines  of  business. 

The  whole  United  States  has  suddenly  taken  an  interest, 
within  the  last  year,  in  this  question  of  agricultural  finance. 
Another  Jew,  David  Lubin,  the  American  founder  and  director 
of  the  great  International  Institute  of  Agriculture  at  Rome,  has 
been  stirring  up  the  bankers  and  business  men  of  America  to 
the  realization  of  the  necessity  for  providing  better  agricultural 
credit  facilities  if  this  country  is  to  prosper  agriculturally  as 
Europe  prospers  to-day.  President  Taft  recently  sent  a  circular 
letter  to  the  governors  of  all  the  states,  asking  them  to  use  their 
influence  to  have  laws  enacted  authorizing  the  establishment  of 
cooperative  banks  on  the  Raiffeisen  plan.  The  Hon.  Myron  T. 
Herrick,  United  States  ambassador  to  France,  who  is  president 
of  a  great  bank  in  Cleveland,  has  sent  voluminous  reports  and 
personally  delivered  lengthy  addresses  before  business  and  bank- 
ing conventions,  urging  the  adoption  in  America  of  the  Raiflfei- 
sen  plan.     At  the  recent  conference  of  governors,  the  necessity 


AGRICULTURAL   CREDIT  135 

of  doing  something  to  make  it  possible  for  the  farmer  to  Ijorrow 
money  on  terms  at  least  equal  to  those  oflfered  men  engaged  in 
other  businesses  was  the  principal  topic  of  discussion. 

Undoulitcdly  laws  framed  explicitly  for  the  purpose  of  pro- 
moting the  organization  of  such  banks  would  be  of  service.* 
Mr.  Robinson  hunted  in  vain  through  the  statute-books  of  New 
York,  Connecticut,  and  New  Jersey  for  such  laws.  But  he 
found  it  perfectly  feasible  in  all  of  these  states  to  organize 
under  the  ordinary  membership  corporation  laws.  He  found 
that  Massachusetts,  in  1909,  had  enacted  a  law  almost  perfectly 
adapted  to  the  organization  and  incorporation  of  cooperative 
associations — and  not  a  single  farmer  or  group  of  farmers  has 
made  the  slightest  attempt  to  take  advantage  of  it. 

"This  movement,  like  every  other  great  movement,  cannot 
start  of  its  own  initiative  or  grow  through  its  own  momentum," 
said  Mr.  Robinson,  when  I  asked  him  why  Massachusetts  farm- 
ers had  not  organized  cooperative  banks  under  this  law.  "The 
farmer  is  the  most  conservative  person  on  earth.  He  is  the  last 
man  to  think  of  cooperating  with  his  neighbor  in  anything — 
even  in  building  a  road  to  town.  It  takes  leadfrship  and  per- 
sistent, long-continued  and  diligent  effort  to  get  the  farmers  to 
unite  for  any  common  purpose.  It  took  Raiflfeisen  fourteen 
years  to  get  the  German  farmers  to  see  the  advantage  to  them- 
selves of  cooperation  in  finance.  It  took  us  four  years,  after  I 
had  found  the  Raiflfeisen  system  was  the  one  best  adapted  to 
the  needs  of  the  Jewish  farmers,  before  we  could  get  the  first  of 
our  credit  associations  organized.  We  have  ten  in  operation  now 
and  are  organizing  more  all  the  time.  It  becomes  easier,  of 
course,  as  time  goes  on,  but  all  the  laws  and  all  the  reports 
and  all  the  speeches  and  all  the  discussions  in  the  world  will 
not  give  the  American  farmers  the  credit  facilities  they  ought 
to  have  unless  active  leaders,  who  know  the  farmers  and  have 
their  confidence,  get  out  among  them  and  work  to  organize  and 
build  up  the  local  associations,  just  as  they  have  been  built  up  in 
Germany  and  other  parts  of  Europe." 

What  the  American  farmer  needs — if  I  have  not  already 
made  it  clear,  let  me  emphasize  it  here — is  the  fluid  dollar;  that 
is,  the  capital — which  ahvays  means  credit — that  he  can  take  out 
of  the  bank  when  he  needs  it,  put  back  in  the  bank  when  he 

1  A  bill  for  such  a  law  is  now  before  the  New  York  Legislature. 


136  SELECTED  ARTICLES 

gets  through  with  it,  and  use  for  productive  agricultural  pur- 
poses at  a  cost  low  enough  to  enable  him  to  make  a  profit  from 
its  use.  That  is  what  the  American  business  man  has  in  every 
line  of  business  except  the  business  of  farming. 

We  are  up  against  a  new  condition  in  this  country — a  con- 
dition in  which  nearly  half  of  the  people  live  in  the  cities,  which 
are  increasing  in  population  at  a  faster  rate  than  the  rural  dis- 
tricts. There  can  never  be  any  cessation  in  the  increasing  cost 
of  food  to  the  non-producer  of  food  until  our  farming  territory 
is  fully  occupied,  intensively  cultivated,  and  raised  to  its  highest 
possible  degree  of  productivity.  And  it  is  perfectly  futile  to  ask 
the  farmer  to  do  this  under  financial  conditions  that  would  wipe 
every  railroad  off  the  map,  close  every  factory,  and  paralyze 
every  brach  of  commerce,  were  the  business  men  of  America 
compelled  to  pay  the  price  for  their  capital  which  the  American 
farmer  has  to  pay  for  his. 


Taft,  William  Howard. 

Letter  to  the  Governors  of  the  States  in  Advocacy  of  Agricul- 
tural Credit  Legislation. 

Executive  Offices, 
Beverly,  Mass.,  October  ii,  1912. 
My  Dear  Governor: 

For  some  months  past,  at  my  direction,  the  Department  of 
State,  through  its  diplomatic  officers  in  Europe,  has  been  en- 
gaged in  an  investigation  of  the  agricultural  credit  systems  in 
operation  in  certain  of  the  European  countries.  Although  the 
investigation  is  still  under  way,  a  preliminary  report  has  been 
submitted,  together  with  the  recommendations  of  Ambassador 
Myron  T.  Herrick  In  connection  with  my  proposal  to  adopt  this 
system  in  the  United  States. 

A  study  of  these  reports  and  of  the  recommendations  of 
Ambassador  Herrick,  which  I  am  sending  you,  convinces  me  of 
the  adaptability  to  American  conditions  of  the  cooperative-credit 
plan  as  set  forth  in  the  organization  of  the  Raiffeisen  banks  of 
Germany.  The  establishment  and  conduct  of  such  banks,  how- 
ever, are  matters  for  state  control.  I  suggest,  also,  the  estab- 
lishment of  land-mortgage  banks  under  state  charters  and  the 


AGRICULTURAL   CREDIT  137 

formation  of  cooperative  mortgage-bond  societies  along  the 
lines  of  the  Landschaften  societies  of  Germany,  provided  that 
uniform  state  legislation  can  be  secured  to  govern  their  organi- 
zation and  operation.  As  a  later  step  I  favor  the  enactment  of 
lava's  by  Congress  permitting  the  organization  of  national  land- 
mortgage  banks,  to  be  operated  under  strict  government  super- 
vision, with  the  power  to  guarantee  and  market  the  guaranteed 
debenture  bonds  of  the  state  land-mortgage  banks  or  coopera- 
tive societies.  I  recommend  for  your  consideration  the  report 
and  recommendations  of  Ambassador  Herrick,  now  published  by 
the  Department  of  State  for  general  distribution.  This  report 
should  receive  the  attention  of  everyone  interested  in  the  prob- 
lem of  agricultural  finance  and,  indeed,  of  all  persons  interested 
in  the  welfare  of  the  American  farmer. 

The  need  for  the  establishment  of  an  adequate  financial  sys- 
tem as  an  aid  to  the  farmers  of  this  country  is  now  quite  gen- 
erally recognized.  The  governmental  initiative,  taken  by  the 
Department  of  State  under  instructions  issued  by  my  direction 
to  the  diplomatic  officers  in  Europe  on  March  18  last,  have  been 
effectively  supplemented  by  the  American  Bankers'  Association, 
the  Southern  Commercial  Congress,  and  by  many  other  bodies 
by  whom  this  question  has  been  agitated,  and  valuable  work  has 
been  done  in  studying  and  disseminating  knowledge  of  those 
great  instrumentalities  which  have  been  created  in  foreign  lands 
to  extend  to  their  agriculturists  credit  facilities  equal  in  benefits 
to  those  enjoyed  by  their  industrial  and  commercial  organizations. 
The  handicap  placed  upon  the  American  farmer  through  the 
lack  of  such  a  system  and  the  loss  sustained  by  the  whole  citizen- 
ship of  the  Nation  because  of  this  failure  to  assist  the  farmers 
to  the  utmost  development  of  our  agricultural  resources  is 
readily  apparent. 

The  twelve  millions  of  farmers  of  the  United  States  add  each 
year  to  the  national  wealth  $8,400,000,000.  They  are  doing  this 
on  a  borrowed  capital  of  $6,040,000,000.  On  this  sum  they  pay 
annually  interest  charges  of  $510,000,000.  Counting  commissions 
and  renewal  charges,  the  interest  rate  paid  by  the  farmer  of 
this  country  is  averaged  at  8J/2  per  cent,  as  compared  to  a  rate 
of  4>4  to  3^  per  cent  paid  by  the  farmer,  for  instance,  of 
France  or  Germany. 

Again,  the  interest  rate  paid  by  the  American  farmer  is  con- 


138  SELECTED   ARTICLES 

siderably  higher  tlian  that  paid  by  our  industrial  corporations, 
railroads,  or  municipalities.  Yet,  I  think,  it  will  he  admitted 
that  the  security  oflfered  by  the  farmer  in  his  farm  lands  is  quite 
as  sound  as  that  offered  by  industrial  corporations.  Why,  then, 
will  not  the  .investor  furnish  the  farmer  with  money  at  as 
advantageous  rates  as  he  is  willing  to  supply  it  to  the  industrial 
corporations?  Obviously,  the  advantage  enjoyed  by  the  indus- 
trial corporation  lies  in  the  financial  machinery  at  its  command, 
which  permits  it  to  place  its  offer  before  the  investor  in  a  more 
attractive  and  more  readily  negotiable  form.  The  farmer  lacks 
this  machinery,  and,  lacking  it,  he  suffers  unreasonably  This 
is  not  theory.  Through  all  the  changing  conditions  of  a  century 
the  soundness  and  practicability  of  such  financial  machinery, 
based  upon  the  peculiar  credit  needs  of  the  agriculturist,  has 
been  tried  out,  and  so  successful  has  been  its  operation  that  in 
Germany,  in  times  of  financial  stress,  money  has  been  taken 
out  of  the  commercial  field  and  placed  in  the  keeping  of  that 
Empire's  agricultural  cooperative  banks  for  safety.  The  value 
of  this  assistance  to  the  farmer  receives  unquestionable  testi- 
monial in  the  growth  of  the  system  in  the  countries  of  Europe. 
More  .specifically  this  advantage  may  be  seen  in  the  fact  that 
through  this  machinery  the  German  farmer  has  received  money, 
at  times,  at  rates  lower  than  those  current  in  commercial  loans. 

But  the  advantages  to  be  gained  by  the  adoption  of  this  plan 
go  beyond  the  direct  saving  in  interest  charges  to  the  farmer. 
The  great  necessity  which  prompted  the  establishment  and  ex- 
tension of  this  plan  throughout  Europe  was  that  of  checking  the 
rapidly  advancing  increases  in  the  cost  of  foodstuffs,  brought 
about  by  the  inevitable  increase  in  consumption  and  the  failure 
of  the  long-drained  soil  to  afford  a  corresponding  increase  in 
production.  That  problem  faces  the  people  of  this  country  to- 
day; not  in  so  severe  a  form  as  it  threatened  the  older  coun- 
tries of  Europe,  but  still  as  a  great  and  pressing  economic 
problem. 

In  Europe  this  problem  has  been  successfully  met,  first,  by 
reducing  the  cost  to  the  farmer  of  producing  his  crops,  and, 
secondly,  by  increasing  his  production  through  the  adoption  of 
improved  methods  of  cultivation.  Both  the  federal  and  state 
governments  in  this  country  have  done  much  to  afford  the 
farmers   instruction   in   improved   agricultural   methods.     But   it 


AGRICULTURAL   CREDIT  139 

still  remains  for  us  to  reduce  the  cost  of  the  farmer's  production 
by  afTording  him  the  necessary  capital  for  the  exploitation  of  his 
soil  upon  the  most  adantageous  terms.  He  must  be  afforded 
the  money  necessary  for  him  to  adopt  improved  methods.  It 
must  be  made  profitable  for  him  to  place  every  acre  of  his 
ground  under  cultivation.  This  offers  the  consumer  relief  from 
the  increasing  cost  of  foodstuffs. 

it  is  this  portion  of  the  task  that  still  remains  to  be  per- 
formed in  this  country,  and  it  is  in  this  task  that  I  invite  your 
cooperation. 

The  country  enjoys  to-day  great  prosperity.  The  factories 
are  busy,  the  workingmen  employed,  and  everywhere  the  v^heels 
of  industry  hum.  The  farmer  shares  in  this  general  prosperity. 
We  have  come  to  look  upon  the  farmer  of  to-day  as  one  of  our 
most  prosperous  citizens.  The  proposal  which  I  make  is  not 
to  subsidize  the  American  farmer.  Fortunately  for  this  coun- 
try, he  does  not  need  it,  nor  would  he  accept  it.  What  this  plan 
offers  is  a  means  to  secure  to  this  country  greater  productivity, 
at  less  cost,  from  the  farms  that  are  now  under  cultivation, 
and,  above  all,  to  give  us  more  farms  and  more  farmers.  It 
will  make  it  profitable  for  the  farmer  to  return  to  the  cultiva- 
tion of  the  abandoned  farms  of  the  East  and  to  open  up  the 
vast  areas  of  untilled  land  in  the  West. 

All  this  can  be  done,  and  I  am  convinced  that  in  this  country 
it  must  be  done,  by  the  efforts  of  the  farmer  himself.  It  is 
natural  that  some  of  the  European  governments  should  have 
extended  a  paternal  protection  over  the  systems  of  agricultural 
finance  and  to  have  given  them  financial  as  well  as  legal  assist- 
ance. This,  however,  must  be  guarded  against  in  this  country. 
We  must  establish  a  credit  system  of,  for,  and  by  the  farmers 
of  the  United  States.  It  were  better,  otherwise,  not  to  consider 
the  matter  at  all.  It  is  an  interesting  commentary  on  the  value 
of  paternalistic  governmental  support  to  note  that  this  plan  of 
agricultural  cooperative  credit  has  thrived  best — in  fact,  has 
enjoyed  a  substantial  development  only — in  those  countries  where 
the  movement  has  grown  up  from  the  farmers  and  where  the 
government  has  to  the  greatest  degree  refrained  from  attempts 
artificially  to  nurture  the  plan  by  subsidy,  and  has  restrained 
its  interference  to  the  proper  field  of  imposing  restrictional  leg- 
islation for  the  purpose  of  preventing  speculation. 


140  SELECTED   ARTICLES 

The  entire  field  of  agricultural  cooperative  credit  is  properly 
divisible  into  two  parts:  First,  the  cooperative  societies  of  farm- 
ers, formed  for  the  purpose  of  obtaining  personal  credit,  and, 
secondly,  the  societies  or  private  corporations  formed  to  create 
a  sound  security  in  land  mortgages  for  the  purpose  of  gaining 
a  national  or  international  market  for  bonds  based  upon  farm- 
land mortgages.  Both  of  these  forms  of  cooperative  credit  may 
be  found  in  many  of  the  European  countries  under  varying 
forms  of  organization.  The  general  principles,  however,  are  very 
much  the  same. 

It  is  not  practicable  here  to  go  into  the  details  of  the  organi- 
zation followed  in  European  countries  in  the  formation  of  these 
cooperative  societies.  A  very  good  law  has  been  enacted  by  the 
State  of  Massachusetts  allowing  the  incorporation  of  credit 
unions,  which  should  furnish  an  excellent  example  for  other 
states.  Their  establishment  is  generally  a  matter  for  state  legis- 
lation and  encouragement,  their  organization  and  management 
are  wonderfully  simple,  and  the  experience  of  the  European 
countries  shows  that  their  success  is  practically  inevitable  where 
the  environment  is  congenial  to  their  growth  and  where  proper 
laws  are  passed  for  their  conduct.  Although  undoubtedly  the 
organization  followed  in  the  European  countries  could  not  be 
adopted  in  its  entirety  in  this  country,  I  would  advocate  the  gen- 
eral principles  followed  by  the  so-called  Raiffeisen  banks  of 
Germany.  These  smaller  societies  should  restrict  their  loans  to 
personal  credit.  They  are  not  intended  to  make  large  loans  on 
land  mortgages,  although,  indirectly;  the  lands  of  all  the  mem- 
bers form  the  security.  Above  all,  the  cardinal  principle  should 
be  followed  that  all  money  loaned  should  be  for  a  strictly  cre- 
ative purpose.  No  loan  for  the  purchase  of  anything  merely  for 
consumption  should  be  tolerated. 

The  business  of  furnishing  money  on  loans  on  real  estate  is 
the  proper  province  of  the  cooperative  societies  or  private  cor- 
porations, which  I  have  placed  in  the  second  class.  In  Germany 
this  is  done  through  cooperative  societies  known  as  Landschaften 
and  through  mortgage  banks.  In  France  it  is  done  through  the 
Credit  Fonder. 

The  chief  advantages  brought  to  farmers  through  such  insti- 
tutions are  lower  interest  rates  and  easy  amortization,  whereby 
the  borrowing  farmer  may  repay  his  loan  bit  by  bit,  extending 


AGRICULTURAL    CREDIT  141 

these  payments  over  a  long  number  of  years.  Thus,  his  obhga- 
tions  are  made  proportionate  to  his  annual  receipts  from  the 
exploitation  of  his  soil,  and  the  danger  of  foreclosure  is  vastly 
reduced.  To  appreciate  what  this  amortization  plan  would  mean 
to  the  farmers  of  this  country,  it  is  only  necessary  to  consider 
the  foreclosure  records  of  some  of  our  states. 

It  is  not  my  purpose  here  to  lay  down  any  one  plan  as  neces- 
sarily the  one  most  suitable  for  adoption  in  the  United  States. 
From  the  reports  of  our  ambassadors  and  ministers  in  Europe 
and  from  the  recommendations  of  Ambassador  Herrick,  to 
whom  was  given  the  task  of  compiling  from  these  the  general 
report,  I  am  inclined  to  suggest  the  suitability  of  organizations 
similar  to  the  German  land-mortgage  banks  for  mcorporation 
under  state  charters  in  this  country.  It  will  be  most  desirable, 
if  not,  indeed,  essential,  that  the  laws  creating  and  governing 
such  institutions  should  be  uniform  throughout  the  states,  in 
order  that  they  might  be  well  understood  by  the  investor,  and 
their  debentures  should  be  given  character  both  at  home  and 
abroad.  As  a  later  step  it  may  prove  advisable  to  urge  the 
enactment  by  Congress  of  laws  permitting  the  creation  of  na- 
tional land-mortgage  banks  similar  to  those  of  Germany  and 
France,  with  limited  privileges,  and  surrounded  and  guarded  by 
strict  supervision,  but  with  sufficient  appeal  to  American  initi- 
ative and  opportunity,  with  the  power  to  guarantee  and  market 
a  guaranteed  debenture  bond  of  the  state  mortgage  bank  or  co- 
operative society.  Securities  issued  by  such  national  institutions 
would  probably  find  a  ready  market  in  Europe  at  low  rates  of 
interest,  since  they  are  a  favorite  and  familiar  form  of  invest- 
ment in  those  countries  by  the  conservative  investor. 

The  most  essential  point  to  bear  in  mind  is  the  need  for  the 
assumption  by  the  federal  and  state  government  of  the  respon- 
sibility for  economically  and  honestly  conducted  institutions. 
Such  assumption  is  the  essential  precedent  for  obtaining  the 
confidence  of  the  American  as  well  as  the  European  investing 
public.  In  this  field,  as  in  all  others,  there  is  room  for  harmful 
exploitation  for  personal  gain.  That  must  be  guarded  against. 
Therefore,  I  invite  you  to  make  this  matter  the  subject  of 
earnest  study  and  exchange  of  views  between  the  state  execu- 
tives, and  I  now  extend  to  you,  with  the  governors  of  other 
states,  a  cordial  invitation  to  confer  with  me  in  Washington,  on 


142  SELECTED   ARTICLES 

the  occasion  of  the  next  annual  conference  of  governors,  in 
order  to  consider  means  for  the  adoption  of  an  agricultural 
credit  system  as  a  benefit  to  the  American  farmer.  I  under- 
stand that  the  congress  of  governors  is  to  occur  in  December. 
Were  not  the  interval  so  short,  my  conviction  of  the  importance 
of  this  subject  would  impel  me  to  invite  you  to  a  special  con- 
ference at  a  still  earlier  date. 

Renewing  my  request  for  your  hearty  cooperation  in  a  work 
of  such  nation-wide  benefit  to  the  farmer,  the  consumer,  and, 
indeed,  to  the  nation  at  large. 

I  am,  my  dear  governor,  very  sincerely  j'ours. 


United   States.     State   Department.     Information   Division. 

Preliminary  Report  on  Land  and  Agricultural  Credit  in  Europe. 

It  is  the  purpose  of  this  report  to  give  but  a  brief  description 
of  the  land  and  agricultural  credit  associations  and  corporations 
in  Europe,  their  origin,  development,  and  relations  to  the  state, 
the  laws  creating  and  governing  them,  the  results  obtained  for 
the  farmer  and  investor,  and  a  few  suggestions  for  improviiig 
the  land  and  agricultural  credit  facilities  in  the  United  States. 

The  investigation  conducted  thus  far  warrants  the  conclusion 
that  land  and  agricultural  credit  are  so  thoroughly  organized 
in  most  of  the  European  nations  that  real-estate  securities  are  as 
liquid  and  sound  as  municipal  bonds,  while  the  honest,  capable, 
and  industrious  farmer  is  able  to  supply  himself  with  working 
funds  for  short  or  long  time  when  desired.  The  institutions 
and  also  the  systems  devised  for  these  objects  have  certain  basic 
features  in  common,  but  vary  considerably  in  type,  and  thereby 
show  a  remarkable  adaptability  to  all  sorts  of  social  and  eco- 
nomical conditions  such  as  exist  in  America.  The  rates  of  in- 
terest at  which  they  are  able  to  obtain  and  lend  money  fall  even 
below  the  European  commercial  rate  and  are  about  one-third  to 
one-half  less  than  what  prevail  in  the  United   States. 

Cooperative  Credit  Associations 

Personal  credit  in  agricultural  Europe  is  obtained  usually  by 
means  of  the  cooperative  credit  associations.  They  are  also 
used  by  artisans  and  small  tradespeople  in  the  towns  and  cities. 


AGRICULTURAL   CREDIT  '         143 

These  associations  are  in  fact  the  only  hanks  which  the  farmers 
will  patronize  for  short-time  loans  in  the  nations  where  they 
abound  in  the  greatest  numbers.  With  their  aid  poverty  and 
usury  have  been  banished,  sterile  fields  have  been  made  fertile, 
production  has  been  increased,  and  agriculture  and  agricultural 
science  raised  to  the  highest  point.  Their  educational  influence 
is  no  less  marked.  They  have  taught  the  farmers  the  uses  of 
credit  as  well  as  of  cash,  given  them  a  commercial  instinct  and 
business  knowledge,  and  stimulated  them  to  associated  action. 
They  have  encouraged  thrift  and  saving,  created  a  feeling  of 
independence  and  self-reliance,  and  even  elevated  their  moral 
tone. 

The  picture  can  hardly  be  overdrawn.  Every  traveler  who 
visits  the  places  M'here  these  little  associations  exist  speaks  in 
glowing  phrases  of  the  prosperity  and  contentment  that  prevail. 
They  are  organized  on  such  simple  lines  that  their  management 
requires  only  ordinary  intelligence.  Failures  have  rarely  oc- 
curred. In  France  and  other  countries  they  hold  a  record  of 
having  never  lost  a  cent.  The  working  capital  and  number  of 
members  of  individual  associations  are  so  small  as  to  be  insig- 
nificant, yet  they  do  one-third  of  the  banking  business  of  Italy; 
while  the  combined  amount  of  their  operations  in  Germany 
equal  that  of  the  commercial  banks.  But  the  mutual  banks,  both 
in  town  and  country,  are  looked  upon  with  favor  in  the  financial 
world  because  they  keep  millions  of  dollars  of  petty  sums  in 
circulation  which,  except  for  them,  would  be  idle  and  hoarded. 
They  are,  in  fact,  feeders  for  the  commercial  banking  system. 

In  1909  in  Belgium  458  banks,  with  a  membership  of  25,762, 
had  outstanding  (roughly  calculated)  $4,000,000  of  loans;  in 
France  96  regional  banks  did  upward  of  $25,000,000  of  business 
on  a  capital  of  $2,983,646,  while  the  2,983  local  banks,  with  a 
membership  of  133,382  farmers,  had  $2,622,241  of  capital  and  a 
record  of  over  $20,500,000  of  operations.  There  were  nearly 
6,000  banks  in  Austria.  The  membership  was  over  725,666,  and 
the  loans  ran  over  $86,500,000.  In  Italy  690  banks  that  fur- 
nished reports  had  a  working  capital  of  over  $170,091,946.  In 
Germany  there  is  one  bank  for  ever>^  1,600  of  the  population,  and 
the  total  business  done  was  over  $4,888,000,000.  In  one  prov- 
ince there  is  a  bank  for  every  3,000  acres  of  land ;  and  so  on 
for  all   other  nations   that   have   cooperative  credit   institutions. 


144         "  SELECTED   ARTICLES 

The  rate  of  interest  charged  was  one  or  two  points  lower  than 
in  commercial  circles,  yet  these  banks,  with  a  few  exceptions, 
made  a  fair  profit  on  the  turnover  of  their  capital.  In  some 
instances  it  ran  as  high  as  5  per  cent  and  7  per  cent. 

With  this  striking  array  of  figures  to  show  its  stability  and 
usefulness,  it  is  remarkable  that  the  farmers  of  the  United 
States  have  been  so  slow  to  adopt  this  system  of  banking  for 
temporary  loans  on  personal  security.  It  has  existed  in  Canada 
for  twenty-two  years.  In  the  Province  of  Quebec  there  are  a 
number  of  mutual  banks  that  have  loaned  hundreds  of  thousands 
of  dollars.  But  Massachusetts  is  the  only  state  in  our  country 
that  has  made  an  attempt  to  encourage  its  introduction.  It 
already  has  a  law  allowing  the  incorporation  of  credit  unions. 
It  was  passed  in  1909  after  a  careful  study  of  European  legisla- 
tion, and  furnishes  an  excellent  example  for  the  other  states. 
7'he  first  concern  to  start  under  this  law  was  the  Myrick  Credit 
Union  of  Springfield.  In  12  months  it  had  105  members,  a 
capital  of  $3,000,  and  $10,000  of  outstanding  loans.  Interest 
rates  have  been  low,  yet  it  paid  over  6  per  cent  dividends  on  its 
.capital.  Thirteen  new  unions  were  formed  in  191 1  and  have 
$25,000  of  capital.  A  pamphlet  issued  by  the  state  bank  com- 
missioner gives  a  comprehensive  description  of  the  fundamental 
principles  that  a  mutual  association  for  personal  credit  must 
adhere  to.  We  can  not  do  better  than  to  quote  from  it.  They 
are  as  follows : 

First.  That  the  association  shall  be  organized  on  cooperative  tines.  As 
the  members  may  be  either  borrowers  or  lenders,  according  to  circum- 
stances, its  affairs  must  be  conducted  in  such  a  way  as  to  give  fair  and 
equitable  treatment  to  both  classes. 

Second.  That  the  association  shall  be  one  of  persons  and  not  of  shares. 
To  this  end  each  shareholder  has  one  vote,  irrespective  of  the  number  of 
shares  he  holds.  Furthermore,  a  limit  is  set  to  the  number  of  shares  or 
the  amount  of  deposit  which  a  member  may  have  in  the  association,  in 
order  that  no  one  person  may  have  a  too  dominating  influence  or  be  able 
to  damage  the  association  by  suddenly  withdrawing  large  sums. 

Third.  That  loans  shall  be  made  only  for  the  purposes  which  promise 
to  result  in  a  saving  or  a  profit  to  the  borrower.  Each  applicant  for  a  loan 
must  state  the  object  for  which  he  desires  to  borrow,  in  order  that  the 
credit  committee,  which  passes  on  all  loans,  may  rigidly  exclude  thriftless 
and  improvident  borrowing. 

Fourth.  As  loans  are  made  only  to  members  and  as  any  member  may 
become  a  borrower,  care  must  be  taken  to  admit  to  membership  only  men 
and  women  of  honesty  and  industry. 

Fifth.     As  personal  knowledge  of  the  character  of  the  members  is  essen- 


AGRICULTURAL   CREDIT  145 

tial,  the  membership  'in  an  association  must  be  restricted  to  citizens  of  a 
small  community,  or  of  a  small  subdivision  of  a  large  city,  or  to  a  small 
group  or  organization  of  individuals. 

Sixth.  Every  provision  must  be  made  to  bring  the  association  within 
the  reach  of  the  humblest  citizen.  The  par  value  of  the  shares  should  be 
small  (it  averages  about  $s),  and  they  should  be  payable  in  very  small 
installments.  Loans  of  very  small  amounts  should  be  made  and  should  be 
repayable  by  installments  if  desired. 

Seventh.  In  making  loans  it  should  be  recognized  that  character  and 
industry  are  the  basis  of  credit,  and  a  loan  may  be  made  to  a  member 
who  has  not  adequate  security  to  pledge  for  it,  provided  he  can  obtain  the 
guaranty  of  one  or  more  other  members,  but  no  member  is  obliged  to 
guarantee    the  loan   of   another  member  unless  he  desires  to   do   so. 

Eighth.  Borrowers  must'  carry  out  to  the  letter  the  conditions  of  re- 
payment agreed  upon  at  the  time  their  loans  are  made.  Prompt  payment 
of  obligations  is  a  fundamental  requirement  of  these  associations. 

It  should  not  be  inferred  from  the  great  success  and  good 
accomplished  that  the  cooperative  credit  associations  could  be 
taken  as  models  in  their  entirety  or  that  the  establishment  of 
such  societies  would  act  as  an  immediate  panacea  for  all  the 
troubles  that  beset  agriculture  in  America.  They  seem  to  be 
adapted  only  for  localities  where  the  population  is  fixed  and 
settled  and  welded  together  in  close  relation  by  community  of 
interests.  In  Austria,  Germany,  Finland,  Ireland,  France,  Rus- 
sia, the  Balkan  states,  and  practically  everywhere  the  state  has 
in  some  way  or  other  given  aid  to  these  banks.  A  very  general 
practice  is  the  distribution  of  subsidies  through  state-endowed 
central  banks  at  rates  that  allow  the  peasants  to  obtain  money 
below  the  ordinary  luarket  figures.  It  is  not  conceivable  that 
American  farmers  would  accept  such  assistance  from  the  gov- 
ernment and  thus  become  a  privileged  class  supported  in  part 
by  the  rest  of  the  people.  The  state-aid  program  in  Europe  has 
made  its  way  against  the  opposition  of  the  true  exponents  of 
cooperation,  because  it  violates  the  cardinal  prmciple  of  self- 
help  upon  which  the  idea  is  founded. 

The  state  intervention  that  has  marred  so  many  European 
systems  was  the  outcome  of  conditions  that  have  never  been 
paralleled  in  the  United  States ;  and  in  considering  this  point 
the  paternal  care  which  princes  formerly  exercised  in  their  do- 
mains should  not  be  overlooked.  The  peasant  was  released 
from  serfdom  in  Germany  in  1807  and  in  Russia  in  1861,  and 
in  other  nations  at  intervals  between  these  dates.  His  release 
did    not-  bring    him    complete    freedom.     It    was    not    until    the 


146  SELECTED   ARTICLES 

feudal  system  and  all  manorial  rights  were  abolished  and  griev- 
ous servitudes  and  dues  commuted  to  fixed  charges  that  the 
peasant  became  a  full-fledged  citizen,  capable  of  acquiring  title 
to  land.  This  finally  came  to  pass  in  Germany  as  late  as  1848. 
He  emerged  from  his  bondage  benumbed  in  mind  and  sensibili- 
ties by  ages  of  oppression,  unambitious,  ignorant,  and  lacking 
the  power  of  initiative.  He  spun  and  wove  his  own  flax,  as  his 
ancestors'  had  done ;  made  his  own  clothes  and  household  uten- 
sils; built  his  thatched  house  with  the  aid  of  neighbors;  and 
raised  whatever  he  ate.  H,  perchance,  anything  had  to  be  pur- 
chased it  was  paid  for  with  farm  products.  Even  taxes  were 
paid  in  this  way.  He  had  no  credit  and  very  little  need  for  it. 
So  he  lived  with  all  his  kind. 

This  Arcadian  existence  was  rudely  disturbed  by  the  rise  of 
modern  industry.  Gradually  the  old  fashions  of  life  in  the 
country  disappeared.  More  taxes  were  levied.  The  growing 
cities  required  more  foodstuffs,  and  the  peasants  who  were 
equipped  and  trained  only  for  local  demand  began  to  produce 
for  the  open  market.  This  meant  commerce,  with  business 
knowledge,  banking  facilities,  and  money,  but  of  these  they  had 
none.  On  account  of  their  abject  ignorance  and  poverty  they 
were  at  the  mercy  of  the  money  lenders  and  middlemen,  and 
became  the  victims  of  the  most  grasping  forms  of  usury.  Their 
plight  was  rendered  desperate  when  improved  methods  of  trans- 
portation and  the  great  steamships  brought  to  the  European 
shores  the  cheap  grains  from  over  seas.  Innumerable  plans  and 
efforts  were  made  to  remedy  the  situation.  Some  of  them  got 
on  the  statute  books,  and  naturally  a  strong  trace  of  them  re- 
mains. Over  200  different  projects  were  submitted  to  the  Na- 
tional Assembly  of  France  around  1852  for  improving  rural 
credit  facilities.  But  the  solution  of  the  problem  was  not 
brought  about  by  governmental  action.  The  mutual  banks  that 
began  to  spread  over  Europe  in  the  sixties  of  the  past  century 
and  which  finally  brought  credit  in  abundance  to  the  farmers 
were  the  results  of  the  life  work  of  two  active  philanthropists 
whose  theories  were  antagonistic  to  state  aid  and  based  on  the 
idea  of  self-help  alone.  The  achievements  of  these  men  may  be 
truly  ranked  among  the  greatest  romances  of  finance.  As  their 
names  are  still  used  to  designate  the  two  principal  types  of 
banks,  the  important  facts  of  their  lives  should  be  known. 


AGRICULTURAL   CREDIT  147 

The  cooperative  idea  for  personal  credit  was  originated  in 
Germany  by  Francis  Frederick  Schulze  a  little  before  the  middle 
of  the  nineteenth  century.  It  passed  over  into  Austria  and  Hun- 
gary in  1851,  into  Italy  in  i860,  into  Belgium  in  1864,  into 
France  in  1883,  into  Scotland  in  1889,  and  into  Ireland  in  1894. 
These  dates  are  given  to  show  the  order  of  advance  and  the 
rccentness  of  the  movement  in  some  parts  of  Europe.  The  first 
German  association  was  formed  in  1849  by  Frederick  William 
Raiffeisen.  Herr  Schulze  did  not  get  his  started  until  the  fol- 
lowing year. 

Herr  Raiffeisen  was  poorly  educated  but  deeply  imbued  with 
religious  feelings.  He  lived  among  peasants  in  a  sparsely  set- 
tled and  impoverished  locality,  and  his  object  was  to  help  the 
lowest  classes.  The  associations  which  grew  up  under  his  guid- 
ing hand  were  mutual  societies  confined  to  small  farming  dis- 
tricts. The  thought  of  profit  was  discarded  and  they  were 
manged  by  the  gratuitous  services  of  their  members.  Herr 
Schulze  was  a  talented  writer  and  speaker,  and  when  he  took 
up  his  life  work  was  holding  a  judicial  post  in  his  native  town 
of  Delitzsche.  His  philanthropy,  although  intense,  leaned  to  the 
practical  side.  He  believed  in  paid  services  and  fair  returns  for 
money.  The  associations  formed  under  his  leadership  were 
located  mainly  in  towns.  They  were  managed  by  salaried  of- 
ficers, and  membership  was  dependent  upon  the  purchase  of 
shares  on  which  dividends  were  allowed.  But  both  kinds  were 
founded  upon  the  fundamental  principle  of  combining  persons 
together  and  using  the  credit  created  by  their  united  guaranty 
for  providing  funds  for  members  who  might  wish  to  borrow. 

In  the  early  days  the  mutual  credit  associations  were  formed 
simply  by  articles  of  agreement  in  the  nature  of  a  partnership 
contract,  and  members  were  jointly  and  severally  liable  without 
limit  for  all  the  loans  that  were  made.  In  course  of  time,  when 
the  government  began  to  take  official  recognition  of  the  associ- 
ations, some  of  the  followers  of  Schulze  favored  a  limit  to  this 
liability.  Hence  the  mark  of  distinction  became  clearly  defined 
between  "Raiffeisenism"  and  the  "Schulze-Delitzsche"  propa- 
ganda. The  German  law,  as  it  now  stands,  requires  mutual 
banks  to  have  share  capital,  but  allows  them  to  be  organized 
upon  the  limited  or  unlimited  liability  plan.  All  true  Raiffeisen 
banks,  in  order  to  preserve  their  character,  have  shares  of  only 

11 


148  SELECTED  ARTICLES 

a  nominal  value  and  devote  dividends  to  educational  or  charit- 
able purposes.  In  Germany  these  local  banks  are  grouped  under 
central  banks,  which  in  turn  are  linked  together  by  two  general 
central  banks,  and  their  funds  are  made  to  move  freely  for 
agriculture  throughout  the  Empire.  The  centralization  of  the 
system  has  also  been  inaugurated  in  France. 

This  brief  description  is  sufficient  for  the  purpose  of  this 
report,  and  no  further  particulars  need  be  given.  Full  and  de- 
tailed information  of  all  the  various  European  associations  and 
systems  has  been  printed  by  the  government  at  Washington  and 
is  now  available  for  the  public.  The  documents  printed  for  free 
distribution  include  translated  bulletins  of  the  International  In- 
stitute of  Agriculture  at  Rome,  the  historical  sketch  compiled  by 
Mr.  Edward  I.  Peters  for  the  Department  of  Agriculture  in  1894, 
and  the  findings  and  comments  of  the  American  ambassadors- 
and  ministers  in  Europe  which  have  been  forwarded  to  the 
State  Department  during  the  past  five  months. 

The  cooperative  credit  associations  have  been  of  incalculable 
value  to  agriculture  in  Europe.  There  is  no  question  on  this 
point,  and  the  investigation  so  far  conducted  shows  quite  as  con- 
clusively that  such  societies  could  be  of  great  benefit  to  farmers 
in  many  parts  of  the  United  States.  The  mutuality  of  the 
organization  is  not  an  untried  idea  in  America.  The  mutual 
life  insurance  companies,  fraternal  aid  societies,  and  building 
and  loan  associations  have  prospered.  Four-fifths  of  the  sav- 
ings of  the  people  are  to-day  deposited  in  mutual  savings  banks; 
and  these  institutions  are  organized  for  encouraging  thrift  and 
industry  and  for  handling  small  sums,  as  is  the  case  with  a 
credit  society  in  Europe.  But  their  operations  are  largely  con- 
fined to  cities  and  towns.  This  is  also  true  of  the  savings  banks 
in  European  nations.  The  only  system  yet  devised  to  give  ample 
banking  facilities  to  farmers  and  afford  them  personal  credit  for 
short-time  loans  seems  to  be  that  of  local  societies  grouped 
together  under  central  banks,  managed  by  the  farmers  them- 
selves, and  exclusively  devoted  to  their  particular  uses.  In  1903 
there  were  16,106  credit  associations  in  Germany;  14,084  were  in 
the  country,  and  over  one-third  of  the  members  of  the  remain- 
ing 2,022  belonged  to  the  agricultural  class.  This  ratio  prevails 
in  all  other  nations  and  proves  the  peculiar  adaptability  of  the 
mutual-credit  idea  for  the  use  of   farmers.     The  establishment 


AGRICULTURAL   CREDIT  149 

of  the  societies  in  America  would  be  a  matter  for  state  legisla- 
tion and  encouragement,  just  as  Massachusetts  has  pointed  out 
the  way.  After  the  societies  have  been  thoroughly  tried  and 
tested  and  become  a  real  part  of  the  banking  systems  of  the 
country,  an  equitable  portion  of  the  millions  of  dollars  pouring 
into  the  postal  savings  banks  might  be  loaned  to  or  deposited 
with  them,  thus  putting  these  funds  to  safe  and  productive  uses, 
and  solving  at  the  same  time  a  vexatious  problem  now  facing 
the  federal  government.  But  we  can  not  be  too  emphatic  in 
cautioning  against  hasty  action.  In  Germany  and  Italy,  w^here 
the  best  models  may  be  found,  success  has  been  attained  by 
slow  growth  and  toilsome  labor  upon  carefully  worked-out 
plans. 

The  rural  cooperative  credit  associations  are,  as  we  have 
shown,  local  mutual  societies  for  encouraging  thrift  and  grant- 
ing loans  for  small  amounts  and  temporary  purposes  on  what 
may  be  called  "character"  security.  The  Raiffeisen  banks  have 
over  $45,000,000  loaned  out  on  mortgage,  but  the  chief  business 
by  far  is  loans  on  current  account  or  for  short,  fixed  periods, 
running  with  renewals  no  longer  than  from  harvest  to  harvest 
and  secured  by  the  guaranty  of  two  associate  members.  The 
societies  obtain  money  for  their  purposes  by  the  deposits  of 
members  and  nonmembers,  and  in  the  Schulze-Delitzsche  banks 
by  share  capital  also ;  but  lending  is  strictly  confined  to  mem- 
bers. The  size  of  the  average  deposit  is  around  $370,  the  aver- 
age loan  $150,  and  membership  95  persons.  These  are  figures 
for  the  German  banks.  In  other  nations  the  averages  are 
smaller.  The  farmer  in  Europe,  when  obliged  to  mortgage  his 
farm,  does  not  go  to  this  credit  society.  This  should  be  kept 
in  mind.  Real  estate  credit  is  usually  obtained  from  the  life 
insurance  companies  or  the  savings  banks,  as  in  America,  or 
from  the  land-mortgage  banks. 

The  Old  Landschaften 

The  land-mortgage  banks  are  either  joint-stock  corporations 
or  societies  of  borrowers.  These  latter  are  typified  by  the  well- 
known  German  Landschaften,  and  are  the  originals  of  all  land 
banks.  Before  them  the  private  money  lender  reigned  supreme. 
The  organization  of  land  credit  in  fact  began  with  them.  They 
undoubtedly    also     suggested    the     cooperative     idea     to     Herr 


ISO  SELECTED  ARTICLES 

Schuize,  because  five,  witli  nearly  $6o,oco,ooo  of  mortgage  loans, 
were  in  existence  in  1848,  when  he  was  trying  to  start  his  per- 
sonal-credit society  at  Delitzsche.  These  peculiar  institutions 
are  associations  of  landowners,  and  have  no  shares  and  pay  no 
dividends,  the  profits,  if  anj^,  going  to  reduce  the  loans;  and 
since  they  and  their  borrowers  are  identical,  and  managerial 
services  gratuitous,  they  have  been  able  to  lend  money  at  lower 
rates  than  any  other  kind  of  companies. 

The  establishment  of  the  old  Landschaften  was  the  outcome 
of  the  indebtedness  and  distress  of  the  nobility,  and  their  mem- 
bership in  Germany  is  still  composed  mainly  of  that  class  and 
large  landed  proprietors.  After  the  Seven  Years'  War  the 
nobles,  who  owned  nearly  all  the  land,  lacked  the  working  capi- 
tal necessary  to  repair  and  cultivate  their  damaged  estates,  and 
so  were  unable  to  pay  their  creditors.  Frederick  the  Great  or- 
dered the  suspension  of  interest  on  all  estate  debts  for  three 
years.  The  period  was  subsequently  extended.  The  result  was 
the  withdrawal  of  the  money  lenders  from  agriculture,  the  rise 
of  interest  to  ruinous  rates,  and  a  financial  stringency  that  in- 
volved the  public  welfare.  In  order  to  relieve  the  situation  this 
autocratic  King  decided  to  adopt  plans  that  had  been  submitted 
by  Herr  Biihring,  a  Berlin  business  man.  Accordingly,  in  1769, 
by  a  royal  fiat,  he  forced  the  nobles  of  Silesia  to  join  an  asso- 
ciation whether  they  wished  to  borrow  or  not,  and  their  lands 
were  made  jointly  liable  without  limit  for  all  loans  granted  by 
the  association.  Loans  were  granted  only  upon  the  consent  of 
the  directorate  elected  by  the  members  themslves.  Great  care 
was  naturally  exercised,  so  no  losses  occurred,  while  immense 
credit  came  to  the  association. 

This  was  the  first  Landschaft.  Others  were  formed  in  the 
same  fashion.  Nine  more  were  formed  by  the  provinces  and 
one  voluntarily.  Then  two  companies  were  organized  on  the 
cooperative  principle,  so  that  there  are  now  25  Land- 
schaften. The  mortgages  held  by  them,  all  on  farm  lands, 
exceed  $500,000,000,  and  the  interest  rate  runs  as  low  as  4  per 
cent  and  3.5  per  cent  per  annum.  The  bonds  by  which  the 
money  for  these  loans  were  obtained  are  secured  by  the  mass  of 
underlying  mortgages  and  general  assets  of  the  issuing  associ- 
ation, and  ultimately  by  the  unlimited  liability  of  all  its  mem- 
bers.    The  collective  guaranty  and  the  fact  that  loans  are  made 


AGRICULTURAL  CREDIT  151 

only  to  members  constitute  the  characterizing  features  of  a  true 
Landschaften ;  but  there  is  a  growing  tendency  to  Hmit  this 
habiHty  and  substitute  reserves  in  place  of  it. 

Originally  a  Landschaft  did  not  give  cash  to  a  member  in 
exchange  for  his  mortgage.  It  gave  him  a  bond  which  simply 
contained  a  promise  to  pay  in  the  event  the  interest  and  prin- 
cipal could  not  be  collected  from  the  debtor.  The  bond  was  of 
the  exact  size  of  the  mortgage,  primarily  secured  by  it,  and 
made  payable  to  bearer  on  a  few  months'  notice.  In  case  of 
default  the  holder  had  to  resort  to  foreclosure  proceedings,  so 
the  bonds  had. only  a  limited  circulation,  and  were  often  sold 
below  par.  This  was  but  a  slight  advance  on  private  money 
lending!  Later  the  associations  undertook  to  collect  the  interest 
and  principal.  Finally  they  assumed  direct  responsibility,  and 
began  to  give  cash  to  members  for  their  mortgages,  raising  funds 
for  this  purpose  by  issuing  and  selling  bonds  of  even  denomina- 
tions for  large  and  small  amounts.  The  practice  of  requiring 
mortgages  to  be  paid  in  lump  was  abolished,  and  in  place  thereof 
the  loans  were  made  repayable  by  annual  installments  running 
through  a  long  period  of  years,  and  the  installments  were  set 
aside  for  redeeming  the  bonds.  These  steps  brought  about  a 
complete  revolution  in  land  credit  and  marked  the  beginning  of 
the  land-mortgage  business  as  it  is  known  to-day.  The  whole 
theory  of  the  organization  of  land  credit  is  based  upon  this 
debenture  bond  and  system  of  amortization  and  sinking  funds 
devised  and  introduced  by  the  Landschaften.  One  without  the 
other  two  is  useless.  The  three  must  be  combined,  and  also 
coupled  with  strong  management  under  wise  laws  in  order  to 
attract  a  steady  flow  of  cheap  money  to  agriculture.  It  is 
remarkable  that  this  truth  has  never  been  realized  or  applied  to 
the  United  States  for  farm-mortgage  loans.  In  spite  of  the 
example  of  practically  every  nation  in  Europe  for  generations, 
the  lending  of  mone}-  on  mortgage  in  America  still  remains 
largely  a  mere  brokerage  business  unrestricted  by  proper  gov- 
erning laws,  either  by  individuals  or  corporations,  while  mort- 
gages continue  to  be  drawn  up  for  three  or  five  years,  when 
experience  shows  that  the  average  life  of  a  loan  is  far  in 
excess  of  that  period  and  needs  to  be  renewed  time  and  again, 
with  added  expense  to  the  debtor  and  trouble  for  the  creditor. 
Had    the    European    amortization    system    been    employed    the 


152  SELECTED   ARTICLES 

companies  dealing  in  western  farm  mortgages  between  1890 
and  1894  probably  would  have  escaped  the  misfortunes  that 
brought  them  down  to  ruin. 

Amortization  is  simply  a  method  of  paying  off  a  loan  by 
returning  a  little  of  the  capital  each  year.  These  payments 
are  called  annuities  and  are  composed  of  the  interest  and  con- 
tributions to  the  sinking  fund  and  the  cost  of  conducting  busi- 
ness. They  are  calculated  for  periods  of  10  to  75  years,  and 
at  the  end  of  the  period  the  mortgaged  debt  becomes  extin- 
guished and  the  property  returns  to  the  owner  free  and 
clear  of  all  encumbrances.  The  prevailing  interest  rate  on 
amortizable  mortgages  in  France  at  present  is  4.3  per  cent.  But 
by  adding  a  little  over  3.2  per  cent  to  this,  and  paying  7.5  per 
cent  a  year,  a  French  farmer  can  extinguish  his  debt  within 
20  years  and  obtain  a  satisfaction  piece  in  full  from  his 
creditor.  Thus,  suppose  he  borrowed  $10,000.  He  pays  $750 
annually  twenty  times  for  the  interest,  sinking  fund  and  ex- 
penses. This  makes  a  total  of  $15,000,  interest  included,  and 
his  debt  is  paid  off.  A  farmer  in  the  Southwestern  states  would 
pay  this  much  for  interest  alone,  and  his  debt  would  still  be 
unsatisfied.  Amortization  has  a  twofold  value.  It  lessens  the 
debtor's  burden  year  by  year  and  increases  in  an  equal  ratio 
the  security  of  the  lender,  provided,  of  course,  the  sinking  fund 
created  by  the  accumulated  annuities  be  properly  and  honestly 
kept  for  the  redemption  of  the  debentures.  The  Landschaften 
were  very  particular  in  this  respect.  Hence,  their  debentures 
obtained  the  confidence  of  the  public,  and  through  their  means 
they  were  able  to  draw  capital  from  all  parts  of  the  country 
for  distribution  among  their  members  at  the  lowest  rates  on 
record.  If  a  holder  of  a  bond  wished  his  money  back  he  had 
merely  to  sell  his  bond  in  the  open  market.  In  this  way  fluidity 
was  given  to  real  estate  securities  for  the  first  time  in  history 
and  the  dream  of  "mobilizing  the  soil"  accomplished  at  last. 
For  these  reasons  the  Landschaften  hold  the  most  prominent 
place  in  the  literature  on  land  credit,  and  everybody  who  studies 
that  subject  must  begin  with  them. 

The  old  Landschaften,  however,  have  many  characteristics 
peculiar  to  their  own  localities  and  dates  of  their  foundation. 
They  are  in  fact  governmental  institutions,  and  their  head 
officers  are  public  functionaries  clothed  with  summary  executive 


AGRICULTURAL   CREDIT  153 

and  judiciary  powers  over  the  property,  and,  to  some  extent, 
over  the  actions  of  their  associate  members.  These  powers 
were  simply  an  enlargement  of  the  feudal  and  manorial  rights 
possessed  by  princes  in  early  times,  and  so,  in  many  respects, 
are  contrary  to  modern  ideas.  But  the  new  Landschaften, 
which  have  adopted  the  best  principles,  present  points  worthy 
of  careful  study.  A  description  of  these  latter  institutions 
taken  from  the  excellent  report  of  Sir  F.  A.  Nicholson  to  the 
Madras  Presidency  in  India  follows. 

The   NcT.v   Landschaften 

These  new  institutions  are  of  different  patterns.  Several  are 
annexes  to  the  older  societies,  but  most  are  independent  and 
resemble  ordinary  mortgage  banks,  except  in  the  essential  point 
that  they  have  no  share  capital  earning  dividends.  They  are, 
as  the  old  societies,  simply  syndicates  of  borrowers  formed  to 
supply  proprietors  with  capital  on  the  lowest  possible  terms  and 
repayable  in  the  easiest  manner.  They  are  gratuitous  inter- 
mediaries between  the  outside  capitalists  and  the  borrowers,  and 
while  performing  services  of  the  highest  importance  in  testing 
the  security  offered  by  the  borrowers  and  in  guaranteeing  to  the 
public  the  safety  of  the  capital  lent  by  them,  they  charge  abso- 
lutely nothing  for  their  services  beyond  a  small  commission, 
perhaps  one-fourth  of  i  per  cent,  or  even  one-tenth  of  i  per 
cent,  to  cover  actual  expenses.  It  is  usual  for  each  association 
to  be  restricted  to  a  particular  area  of  operations  within  which 
every  proprietor,  whether  noble  or  peasant,  may  obtain  a  loan  if 
he  can  offer  sufficient  security.  There  is  always  a  minimum 
limit  either  to  loans  or  to  the  value  of  property  on  which 
loans  will  be  given.  This  is  usually  low.  In  the  new  Braden- 
burg  Landschaft,  affiliated  to  the  old  Kur-und-Neumark  Land- 
schaft,  loans  may  be  granted  on  property  having  a  net  income 
of  only  $25.     The  minimum  limit  is  seldom  even  approached. 

Members  are  those  who  borrow  from  the  bank.  They  are 
generally  responsible  in  all  their  property,  not  merely  for  their 
own  borrowings,  but  for  the  debts  of  the  society  to  the  outside 
public.  But  in  some  cases  only  the  property  pledged  to  the 
society  is  responsible;  in  others  they  are  bound,  in  case  of  need, 
to  pay  a  sum  proportionate  to  the  amount  of  their  own  bor- 
rowing.    There    are    no    shares    to   be   paid    up    except    in    two 


154  SELECTED   ARTICLES 

societies.  These  two  resemble  cooperative  societies,  for  the 
shares  are  personal  and  nontransferable,  are  of  unlimited  num- 
ber, varying  with  the  number  of  members,  and  their  value  is 
claimable  by  a  withdrawing  member.  The  share  seems  to  be 
demanded  simply  to  provide  a  first  working  capital  and  the 
nucleus  of  a  reserve.  The  amount  of  the  share  is  frequently  a 
certain  percentage  of  the  amount  of  the  loan  required.  Some 
societies  demand  an  entrance  fee  of  a  few  cents,  which  goes  to 
the  reserve.     This  reserve  will  be  dealt  with  below. 

The  societies  in  general,  having  no  share  capital,  do  not 
lend  their  own  funds.  The  candidate  for  a  loan  asks  that 
debentures  may  be  issued  against  a  mortgage  of  his  property. 
This  is  then  examined.  If  the  security  is  approved  the  can- 
didate executes  a  mortgage  deed  to  the  society,  which  thereupon 
issues  debentures  which  are  placed  on  the  market  and,  being 
sold,  provide  the  funds  for  the  loan.  In  the  old  banks  the 
debentures  are  simply  handed  to  the  borrower,  who  sells  them 
for  himself.  In  the  new  land  banks  either  this  is  done  or  the 
bank  sells  them  and  pays  the  borrower  the  value  if  below  par, 
or  if  they  sell  above  par  then  the  face  value,  the  surplus  going 
to  the  reserve;  or  they  simply  issue  debentures  on  the  market 
and  pay  the  borrower  the  amount  of  the  loan  as  settled.  It  will 
be  seen,  then,  that  the  banks  have  no  capital  and  no  need  for  it. 

The  debentures  are  for  the  usual  class,  secured  not  by  the 
particular  mortgage  on  which  they  are  issued,  but  by  the  whole 
mass  of  mortgages  held  by  the  bank  and  by  all  its  proper  forms 
of  security,  viz.,  the  property  of  the  members,  the  reserve  or 
guaranty  fund,  and  even  the  sinking  funds.  In  some  banks 
a  debenture  holder  has  the  right  (never  needed,  however)  of 
requiring  a  court  to  assign  a  particular  mortgage  against  his 
debenture  as  a  specific  security  in  case  the  bank  should  fail  to 
pay  him  his  interest  or  capital  due.  A  debenture  holder  can 
not  demand  payment  of  his  debenture,  except  when  it  is  drawn 
for  payment.  But  the  bank  can  call  in  any  at  six  months' 
notice,  besides  withdrawing  them  by  lot  in  the  usual  way. 
These  debentures  enjoy  an  excellent  position,  the  4  per  cents 
selling  usually  at  or  above  par.  Since  cheapness  of  loans  is 
the  sole  object  of  the  bank,  it  is  customary  to  call  in  debentures 
selling  at  a  premium  and  issue  a  fresh  series  at  a  lower  rate. 

Loans    are    usually    applied    for    to    the    district    committee 


AGRICULTURAL   CREDIT  155 

which  each  bank  has,  with  a  statement  of  the  property,  the 
amount  required,  and  all  documents  necessary  to  prove  title  and 
freedom  from  encumbrance.  Properties  may  be  valued  by  a 
special  valuation,  or  a  multiple  of  the  net  income  as  assessed 
to  the  land  tax  may  be  taken.  In  both  cases,  however,  an 
inspection  of  the  property  is  necessary  unless  under  a  special 
rule.  Half  to  two-thirds  of  the  estimated  value  is  allowable  as 
a  loan.  The  interest  paid  by  the  borrow-er  on  the  loans  is  that 
paid  by  the  bank  on  the  debentures,  the  bank  being  merely  an 
intermediary  betwen  the  borrower  and  the  actual  lending  public. 
But  where  the  bank  pays  the  loan  in  cash  it  charges  such  interest 
as  it  thinks  proper,  in  order  to  make  up  any  loss  should  the 
debentures  sell  below  par.  Loans  are  repayable  almost  entirely 
by  amortization,  usually  in  about  53  years.  Some  short- 
term  loans  are  granted,  with  corresponding  debentures.  The 
bank  can  not  demand  repayment  of  a  loan  except  in  case  of 
waste,  deterioration,  or  the  like.  On  the  other  hand,  the  bor- 
rower is  at  liberty  to  repay  in  whole  or  in  part  whenever  he 
pleases,  bvit  must  pay  the  entire  interest  for  the  half  year  in 
which  he  repays.  The  loan  is  repaid  by  an  annuity  consisting 
of  the  interest,  sinking  fund  (usually  beginning  at  one-half  of 
I  per  cent),  with  a  contribution  to  the  reserve  or  guaranty 
fund,  and  another  for  the  expenses  of  administration.  The 
annuities  have  totaled  6  per  cent,  but  they  now  average  around 
4  per  cent  or  lower ;  e.  g.,  interest  being  3  per  cent,  sinking 
fund  one-half  of  i  per  cent,  guaranty  fund  one-fourth  of  i 
per  cent,  and  expenses  one-fourth  of  i  per  cent.  Some  of  the 
banks  also  require  a  lump  payment  on  the  grant  of  the  loan 
of  I  or  2  per  cent,  to  be  credited  either  to  the  working  or  to 
the  guaranty  fund.  The  working  fund  is  formed  by  the 
contribution  made  for  the  expenses  of  management  and  any 
special  sources. 

Hungary  is  the  only  nation  outside  of  Germany  that  has  a 
true  Landschaft  of  the  original  type.  But  modified  forms  exist 
in  Russia,  Austria,  Switzerland,  Denmark,  and  Roumania,  where 
they  have  been  useful  in  supplying  agriculture  with  cheap  capi- 
tal. There  is  no  older  principle  in  land  credit  than  the  Land- 
schaften  idea.  It  has  been  tested  and  proved  by  over  130  years 
of  success,  and  could  undoubtedly  be  employed  to  advan- 
tage by  water  users'  associations  in  the  irrigated  regions  of  the 


156  SELECTED   ARTICLES 

West  and  in  other  parts  of  the  United  States  where  landowners 
might  unite  to  raise  funds  for  drainage  or  other  improvements 
for  their  common  good.  Some  of  the  banks  of  Switzerland 
and  the  credit  associations  of  Denmark,  with  the  laws  govern- 
ing them,  perhaps  furnish  the  best  models,  as  appears  from  the 
reports  of  the  American  ministers  to  those  countries  that  have 
been  forwarded  to  the  Secretary  of  State. 

The  most  noticeable  fact  revealed  by  the  investigation  of 
the  European  land-credit  institution  is  the  all-pervading  pres- 
ence of  the  state  in  every  nation.  Alost  of  the  older  joint- 
stock  corporations  have  a  public  character  equal  to  that  of  the 
German  Landschaften.  Every  one  that  dates  back  to  1850  to 
i860  was  directly  organized  by  the  state  or  brought  into  exist- 
ence by  a  government  fiat  or  favoring  legislation,  subsidized  in 
some  way  or  other  and  granted  special  privileges.  The  super- 
vision now  exercised  over  them  all  is  most  stringent,  going  into 
the  minutest  details  and  varying  from  direct  control  to  sur- 
veillance by  state  officials,  usually  by  special  laws  that  impose 
heavy  penalties  for  malfeasance  or  even  neglect  of  regulations. 
Continental  Europe  is  accustomed  to  state  intervention.  Com- 
mercial credit  was  organized  by  means  of  central  banks  con- 
nected with  the  government,  and  so  this  regime  was  naturally 
followed  in  organizing  the  land  credit.  For  this  reason  the 
results  obtained,  at  least  in  some  instances,  can  not  be  used  by 
way  of  comparison  to  illustrate  the  possibilities  of  organization 
along  the  lines  of  private  and  independent  endeavor. 

But  whatever  may  be  the  opinion  entertained  for  the  state 
intervention  in  the  land-credit  system  of  the  Continent,  there 
can  be  no  doubt  that  the  working  principles  and  business  meth- 
ods of  the  European  land-mortgage  banks  are  the  best  ever 
devised,  and  that  they  will  have  to  be  introduced  into  the 
United  States  if  it  be  hoped  to  make  the  farm  mortgage  a  fluid 
and  popular  form  of  investment  and  direct  a  flow  of  capital  in 
sufficient  volume  to  agriculture  to  enable  it  to  keep  pace  with 
the  progress  of  the  nation.  The  main  features  of  this  system 
are  the  limitation  of  the  interest  rate  that  can  be  charged,  the 
amortization  of  the  debt,  and  wise  and  equitable  regulations  and 
restrictions  relative  to  loans  and  the  issuance  of  debentures 
which  protect  the  farmer  from  extortion  and  thriftless  borrow- 
ing, and  at  the  same  time  bring  safety  and  a  feeling  of  con- 


AGRICULTURAL   CREDIT  157 

fidence  to  the  investing  public.  Tliese  features,  with  modifica- 
tions and  additions,  appear  in  all  European  land  banks,  whether 
they  be  semipublic  as  they  are  in  France,  Spain,  and  Russia,  or 
of  a  private  character,  as  with  some  cases  in  Germany,  or  of 
the  mixed  type  of  Switzerland  and  Italy,  but  are  best  exempli- 
fied in  the  great  Credit  Foncier  of  France — the  largest  and  most 
successful  land  bank  in  the  world. 

TJic  Credit  Foncier  of  France 

This  famous  institution  was  formed  in  1852  under  the  law 
enacted  that  year  for  organizing  the  land  credit  and  improving 
agricultural  credit  facilities.  It  was  immediately  placed  under 
government  control,  given  a  subsidy,  and  granted  a  monopoly 
for  25  years.  The  monopoly  was  not  renewed,  but  all  its 
original  special  privileges  remain,  which  perhaps  accounts  for 
its  being  the  only  land  bank  in  France.  Its  relation  with  the 
state  is  very  close,  and  many  of  its  most  important  features  were 
taken  bodily  from  the  Landschaften.  Inasmuch  as  the  institu- 
tion has  been  the  model  for  all  Europe  and  is  now  being  widely 
discussed  in  the  American  press  a  description  at  length  will  be 
given  of  it. 

The  governor  and  two  subgovernors  of  the  Credit  Foncier 
are  appointed  for  life  by  the  President  of  the  Republic.  It  is 
subject  to  the  surveillance  of  the  Treasury  Department  of  the 
government,  and  three  of  its  directors  must  be  high  officers  of 
the  department.  It  may  use  the  government  treasuries  for  the 
receipt  of  its  dues  and  the  deposit  of  its  surplus  funds  and 
enjoys  a  reduction  in  stamp  and  registration  duties. 

Its  debentures  are  registered  or  payable  to  bearer,  and  the 
claim  of  a  third  party  to  them  can  not  be  made  in  court  except 
in  case  of  theft  or  loss.  Trust  and  public  funds  may  be  in- 
vested in  them.  Its  mortgages  are  exempt  from  the  decennial 
registration  and  consequent  charges  required  of  other  mort- 
gages. It  has  a  cheap  and  speedy  method  of  "purging"  the 
title  of  real  estate  in  case  of  disputes.  In  the  event  of  default 
the  courts  can  not  grant  the  debtor  any  delay  and  paynients  due 
it  upon  loans  can  not  be  garnished  or  attached.  It  is  allowed 
summary  proceedings  for  attacking  mortgage  property  in  case 
of  violation  of  contracts.  If  dues  are  not  paid  or  if  the  prop- 
erty deteriorates  it  may  attach  and  sell  the  property  simply  upon 


IS8  SELECTED   ARTICLES 

notice  and  publication.  During  attachment  proceedings  it  has  a 
right  to  all  returns  from  the  estate.  The  sale  may  be  by  auction 
in  a  civil  court  or  at  a  notary  public's  office,  if  the  court  per- 
mits, and  no  adverse  claim  to  the  proceeds  of  the  sale  can  be 
allowed  until  its  claims  arc  fully  satisfied. 

The  regulations  unaer  which  the  Credit  Foncier  transacts 
its  business  are  very  strict.  The  mortgage  loans  must  be  first 
liens.  The  property  must  have  a  clear  and  unencumbered  title 
and  yield  a  certain  and  durable  income.  Loans  on  theaters, 
mines,  and  quarries  are  not  accepted.  The  amount  loaned  on 
any  property  must  not  exceed  half  its  value,  or  one-third  the 
value  for  vineyards,  woods,  orchards,  and  plantations.  Factory 
buildings  are  estimated  without  regard  to  their  value  for  par- 
ticular purposes.  A  borrower  can  not  bind  himself  to  pay  a 
greater  annuity  than  the  total  annual  income  of  the  property 
mortgaged,  while  on  the  other  hand  the  society  is  not  allowed 
to  charge  borrowers  0.6  per  cent  over  the  rate  at  which  it 
obtains  money  on  its  debentures  issued  at  the  time  of  the  loans. 
An  excess  of  only  0.45  per  cent  is  allowed  on  loans  to  muni- 
cipalities. The  outstanding  loans  and  debentures  issued  must 
exactly  correspond  in  amounts. 

After  paying  a  5  per  cent  dividend  the  Credit  Foncier  must 
set  aside  between  5  and  20  per  cent  of  the  balance  of  the  profits 
each  year  for  the  obligatory  reserve,  and  continue  to  do  so  as 
long  as  the  same  does  not  equal  one-half  of  the  capital  stock. 
The  investment  of  this  reserve  is  left  to  the  board  of  directors. 
The  capital  stock  of  the  society  must  be  always  maintained  at 
the  ratio  of  one-twentieth  or  more  of  the  debentures  in  circula- 
tion and  is  the  primary  guaranty  of  its  obligations,  especially 
the  debentures.  The  capital  at  present  is  $40,000,000,  divided 
into  400,000  shares  of  $100  each ;  but  authority  has  been  ob- 
tained to  increase  the  same  to  $50,000,000,  represented  by  500,000 
shares,  which  will  be  done  before  the  debentures  in  circulation 
pass  the  legal  limit.  One-fourth  of  the  capital  must  be  invested 
in  French  rentes  or  other  treasury  bonds ;  one-fourth  in  ofifice 
buildings  of  the  society,  or  by  loans  to  French  colonies,  or  in 
securities  deposited  with  the  Bank  of  France  as  a  guaranty  for 
advances.  Shares  can  not  be  issued  at  a  price  below  par. 
They  are  nonassessable.  The  surplus  may  be  loaned  on  mort- 
gages or  to  municipalities  or  may  be  used  in   other  mortgage 


AGRICULTURAL   CREDIT  159 

business  allowed  by  the  statutes ;  and  for  buying  its  own  de- 
bentures, making  advances  to  borrowers  in  arrears,  or  pur- 
chasing mortgaged  property  in  foreclosure;  and  for  acquiring 
commercial  paper  acceptable  by  the  Bank  of  France  or  securities 
to  be  deposited  with  that  bank. 

The  governor  of  the  Credit  Foncier  must  be  the  owner  of  at 
least  200  shares  of  stock  of  the  society.  He  receives  a  salary 
of  $8,000.  The  sub-governors  must  hold  100  shares  each.  Their 
salaries  are  $4,000.  They  perform  such  functions  as  are  dele- 
gated to  them  by  the  governor,  and  in  order  of  their  nomination 
fulfill  his  duties  during  his  absence  on  account  of  illness  or 
other  causes.  The  governor  appoints  and  dismisses  all  agents 
of  the  society  and  superintends  the  organization  of  the  service 
in  Paris  and  elsewhere.  He  countersigns  the  debentures  and 
signs  the  share  certificates  and  all  other  papers  and  documents 
and  must  strive  to  promote  the  interests  of  the  society  in  every 
way.  The  governor  is  the  head  of  the  board  of  directors,  which 
is  composed  of  himself,  the  two  subgovernors,  the  auditors, 
and  20  to  23  directors.  This  body  possesses  the  administrative 
powers  of  the  society  and  is  beholden  only  to  the  laws  and 
the  general  assembly  of  the  stockholders  for  the  proper  exer- 
cise of  the  same.  The  three  auditors  are  the  guardians  of  the 
society.  Their  duties  are  to  watch,  investigate,  and  make  re- 
ports. The  only  power  they  have  is  to  call  extraordinary  gen- 
eral meetings  of  the  shareholders. 

The  general  assembly  of  the  stockholders  meets  regularly 
once  a  year.  It  consists  only  of  the  200  largest  stockholders, 
of  whom  40  make  a  quorum  if  they  hold  one-tenth  of  the 
stock  of  the  society.  Each  member  has  one  vote  for  every 
40  shares  of  stock  held,  but  can  not  cast  more  than  five  votes 
in  his  own  name,  nor  more  than  10  in  his  own  name  or  by 
proxy.  He  has,  however,  a  right  to  one  vote  even  though  his 
shares  be  less  than  40  in  number.  The  general  assembly 
receives  the  report  of  the  governor,  and  also  of  the  auditors,  if 
any.  It  elects  the  directors  and  auditors  and  decides  on  all 
resolutions  or  proposals  for  the  increase  of  capital,  the  amend- 
ment of  the  by-laws  and  constitution,  and  generally  on  all  mat- 
ters not  otherwise  specifically  provided  for. 

The  only  places  outside  of  France  where  the  Credit  Foncier 
can  do  business  are  Algiers  and  Tunis.     Under  a  clause  in  its 


i6o  SELECTED  ARTICLES 

charter  which  allows  it,  with  the  sanction  of  the  government, 
to  enter  into  projects  for  improving  the  soil,  developing  agricul- 
tnre,  and  to  extinguish  existing  debts  on  real  estate,  etc.,  the 
society  has  been  authorized  to  finance  drainage  projects  and  to 
advance  money  on  the  paper  of  the  Sous-Comptoir  des  Entre- 
preneurs, an  incorporated  association  of  builders.  It  may  also 
receive  deposits  up  to  $20,000,000,  one-fourth  of  which  must  be 
kept  in  the  government  treasury  and  the  balance  invested  in 
government  paper,  treasury  bonds,  or  high-class  bankable  com- 
mercial notes  and  securities.  In  connection  with  its  banking 
house  it  has  large  deposit  vaults. 

The  Credit  Foncier  is  permitted  to  take  short-term  mort- 
gages and  does  a  big  business  in  that  line.  But  the  true  purpose 
of  its  existence  and  the  greatest  part  of  its  operations  are  the 
granting  of  long-time  loans.  These  are  made  on  mortgages  to 
individuals  and  without  mortgage  to  municipalities  and  public 
establishments.  The  periods  run  from  10  to  75  years.  The 
annuities  required  to  be  paid  for  amortizing  the  loan  for  the 
average  period  used  are  so  small  as  to  appear  insig- 
nificant. The  success  achieved  by  the  Credit  Foncier  in  popu- 
larizing the  amortization  principle  for  real  estate  loans  is  the 
chief  cause  of  its  great  renown.  At  present  its  interest  rate  for 
mortgage  loans  is  4.3  per  cent  per  annum,  for  public  establish- 
ments 4.1  per  cent,  and  3.85  per  cent  for  municipalities.  The 
total  annuity,  including  both  interest  and  amortization  sum,  for 
a  25-year  mortgage  loan  is  a  little  over  6.5  per  cent.  With 
this  small  annual  payment  the  debt  is  gradually  wiped  out, 
and  nothing  is  left  to  be  paid  at  the  end  of  the  term.  The 
longer  the  term  the  smaller  the  annuity,  and  vice  versa.  The 
loans  now  exceed  $870,000,000.  An  amortization  table  of  the 
society  follows : 

Annuity  of  a   capital  of  $100,  interest  at  4.3  per  cent,  payable 
setni-anntially 

Duration.  Annuities.                  Duration.  Annuities. 

5  years $22.440405  45  years $5.043495 

10  years 12.409111  50  years 4.881753 

15  years 9.115217  55  years 4.758395 

20  years 7.504843  60  years 4.663140 

25  years 6.566976  65  years 4.588881 

30  years 5,964436  70  years 4.530558 

35  Vears 5.552593  75  years 4.484483 

40  years 5.259040 


AGRICULTURAL   CREDIT  i6i 

The  Credit  Foncier  is  obliged  to  keep  the  interest  and  amor- 
tization payments  in  separate  accounts,  the  latter  going  to 
create  a  sinking  fund  for  the  retirement  of  outstanding  debent- 
ures. As  stated  above,  the  amounts  of  the  loans  and  debentures 
must  balance  each  other;  consequently,  as  loans  are  paid  up 
debentures  must  be  paid  off.  Borrowers  have  the  right  to  pay 
in  advance,  which  they  frequently  exercise,  so  the  proper  adjust- 
ment of  the  balance  is  beyond  the  control  of  the  society.  It  is 
for  this  reason  that  the  debentures,  although  calculated  to  be 
redeemed  synchronously  with  the  loans  they  represent,  have  no 
fixed  time  for  maturity  and  are  recallable  at  option.  In  each 
issue  a  certain  number  are  repayable  by  lots,  with  prizes  for  the 
lucky  holders.  A  bond  last  year  drew  a  prize  of  $40,000.  The 
right  to  give  prizes  at  the  lottery  drawings  is  one  of  the  special 
'privileges  of  the  society.  The  debentures  are  of  two  kinds — 
those  representing  the  mortgages  are  called  "foncieres"  and 
those  representing  the  loans  to  municipalities  and  public  estab- 
lishments are  called  "communales."  They  are  issued  in  series. 
The  smallest  denomination  is  $20.  They  may  be  bought  by 
installments  and  are  the  most  popular  form  of  investment  in 
France,  being  held  largely  by  farmers  and  poor  people  in  the 
cities.  The  issue  of  1912  for  $100,000,000  at  3  per  cent,  payable 
within  70  years,  was  oversubscribed  18  times.  The  total  land 
mortgages  and  municipal  indebtedness  in  France  is  figured  at 
$2,8co,ooo,ooo.  Nearly  one-third  of  this  is  represented  by  the 
loans  of  the  society. 

Such  is  the  Credit  Foncier  of  France.  The  control  exer- 
cised over  it  by  the  state  through  the  appointment  of  its  head 
officers,  the  simplified  foreclosure  proceedings,  and  the  other 
judicial,  administrative,  and  fiscal  privileges  accorded  to  it  are 
common  practices  in  continental  Europe.  As  mentioned  above, 
all  the  older  banks  are  specially  privileged,  and  consequently 
have  a  practical  monopoly  of  the  mortgage-bond  business  in 
some  of  the  nations. 

German  Mortgage  Banks 

In  view  of  this  fact  the  mortgage  banks  of  Europe  may  be 
classified  generally  as  public  or  semi-public,  and  as  strictly  pri- 
vate institutions.  The  first  have  just  been  described.  The 
latter  are  all  those   which,   whether  they  consist  of  lenders  or 


i62  SELECTED   ARTICLES 

only  of  borrowers,  operate  under  general  laws  and  have  abso- 
lutely no  privilepcs.  The  state,  however,  does  not  leave  these 
companies  entirely  to  their  own  devices.  They  are  limited  in 
the  conduct  of  their  business  by  strict  rules  and  regulations, 
and  are  subject  to  the  most  scrutinous  supervision.  The  best 
law  of  this  kind  is  that  enacted  in  Germany  in  1899.  It  is  the 
last  word  in  legislation  for  private  joint-stock  mortgage  banks, 
and  with  slight  modifications  could  be  easily  adapted  to  the 
United  States,  as  it  was  framed  to  overcome  the  troubles  oc- 
casioned by  the  conflict  of  authority  between  the  sovereign 
provinces  of  which  the  Empire  is  composed.  Remarkable  as  it 
may  seem,  these  companies  in  Germany  have  outstripped  the  old 
established  and  specially  privileged  public  banks.  They  now 
have  $2,618,000,000  loaned  out  on  mortgage,  or  over  five  times 
more  than  the  Landschaften.  The  capital  is  $170,563,000,  the 
smallest  being  $238,000  and  the  largest  $14,000,000.  The  bonds 
in  circulation  amount  to  $2,548,009,000,  with  interest  at  3>4  or 
4  per  cent  per  annum,  while  the  average  returns  on  mortgage 
loans  are  4.22  to  4.33  per  cent  per  annum.  As  6  per  cent  and 
even  14  per  cent  dividends  are  yearly  declared,  the  figures  again 
furnish  a  favorable  comparison  with  the  Landschaften  and 
Credit  Foncier.  The  provincial  head,  however,  selects  the  presi- 
dent of  one  of  these  newer  German  banks,  while  the  Imperial 
Government  watches  over  them  all.  The  supervision  is  carried 
out  by  royal  commissioners  and  extends  to  the  minutest  detail. 
These  inspecting  officials  have  the  right  to  verify  the  securities 
and  cash  on  hand,  and  demand  information  regarding  every 
separate  transaction.  They  may  also  send  a  representative  to 
genei^l  meetings  of  stockholders  and  to  sittings  of  boards  of 
directors  and  take  all  measures  that  may  seem  fit  to  enforce 
the  proper  conduct  of  business.  They  also  approve  the  appoint- 
ment of  the  auditor  and  assistant  auditor,  who  are  charged  in 
each  bank  with  the  duty  of  seeing  that  debentures  are  issued 
only  upon  the  conditions  and  within  the  limits  legally  prescribed. 
This  German  law  of  1899  has  been  so  effective  in  directing  the 
flow  of  cheap  money  through  these  banks  for  the  purchase  and 
improvement  of  real  estate,  and  furthermore  illustrates  so  clearly 
the  trend  of  modern  European  legislation  that  a  translation  of 
its  chief  provisions  has  been  made  and  is  given  below. 

Companies  of  limited  or  unlimited  liability  founded  in  Ger- 


AGRICULTURAL   CREDIT  163 

many  for  the  purpose  of  lending  money  on  real  estate  and  for 
the  issue  of  bonds  on  such  mortgages,  and  the  institutions 
known  under  the  name  of  mortgage  banks,  require,  in  order  to 
carry  on  such  business,  the  consent  of  the  Federal  Council.  If 
in  the  statutes  of  a  mortgage  bank  it  is  declared  that  such  bank 
will  only  make  mortgage  loans  in  the  state  of  the  Empire  in 
which  it  has  its  head  office,  the  authorization  shall  be  given  by 
the  authorities  of  the  state  in  question.  The  consent  of  the 
council  is  also  necessary  for  any  change  in  the  statutes  of  any 
mortgage  bank. 

Mortgage  banks  shall  be  subject  to  government  inspection. 
This  inspection  shall  be  carried  out  by  the  inspector  in  the  state 
in  which  the  bank  shall  have  its  head  office.  The  inspection 
shall  extend  to  the  entire  business  of  the  bank  and  shall  con- 
tinue after  the  dissolution  until  completion  of  the  liquidation. 

The  total  amount  of  mortgage  bonds  issued  shall  be  secured 
by  mortgages  of  at  least  equal  value  and  bearing  an  equal  rate 
of  interest.  Such  security,  as  far  as  mortgages  on  agricultural 
property  are  concerned,  shall  consist  to  the  extent  of  at  least 
one-half  of  the  mortgages  with  amortization,  and  with  a  yearly 
amount  of  amortization  of  not  less  than  one-fourth  of  i  per  cent 
of  the  mortgaged  properties.  The  banks,  may,  however,  in  cases 
in  which  mortgages  are  paid  back  before  they  are  due,  and  until 
the  amortization  period  has  run  out,  make  use  of  the  interest  as 
cover.  If  the  bank  takes  over  a  property  on  which  it  has  a 
mortgage  in  order  to  prevent  the  loss  of  the  said  mortgage,  it 
shall  only  use  this  property  as  cover  for  mortgage  bonds  to  the 
extent  of  one-half  the  price  the  bank  paid  when  it  purchased 
said  property.  If  on  account  of  repayment  of  mortgages  or  any 
other  causes  the  mortgage  bonds  are  no  longer  secured,  and  if 
the  necessary  security  can  not  at  once  be  replaced,  the  bank 
shall,  for  the  time  being,  replace  the  failing  mortgage  securities 
by  Imperial  Government  bonds  or  by  those  of  the  federal  state 
or  by  cash.  Such  government  securities  shall  be  valued  at  5 
per  cent  below  their  price  on  the  bourse  at  the  time  of  purchase. 

A  mortgage  bank  shall  not  issue  mortgage  bonds  for  any 
sum  exceeding  15  times  the  amount  of  the  paid-up  capital  and 
the  reserve  funds  which  shall  have  been  created  solely  for  the 
purpose  of  covering  deficits  or  for  the  security  of  the  holders 
of  such  bonds. 


12 


t64  selected  articles 

Loans  by  mortgage  banks  sball  be  Hmited  to  real  estate  in 
Germany.  Only  first  mortgages  on  such  real  estate  shall  be 
allowed.  The  amount  advanced  by  a  mortgage  bank  on  the 
security  of  such  property  shall  not  exceed  three-fifths  of  the 
total  value  of  the  property.  The  authorities  may  permit  loans 
to  be  made  on  agricultural  properties  to  the  extent  of  two-thirds 
of  the  value. 

The  estimated  value  of  the  property  on  which  money  is  lent 
on  mortgage  shall  not  exceed  the  estimated  sale  price  arrived 
at  after  a  careful  valuation  of  the  property.  In  the  estimation 
of  such  value  the  permanent  value  of  the  property  and  the 
revenue  therefrom  shall  alone  be  considered ;  that  is  to  say,  the 
value  which  the  property  should  produce  when  properly  man- 
aged by  its  owner.  In  the  case  of  a  valuation  having  been 
made  by  a  public  official  of  the  state  in  which  a  given  property 
lies,  the  Federal  Council  may  decide  that  the  estimation  of 
value  made  for  the  bank  for  the  purpose  of  a  mortgage  shall 
not  exceed  the  valuation  made  by  the  official  in  question.  Mort- 
gages on  building  lots  or  on  uncompleted  buildings  which  pro- 
duce no  revenue  shall  not  be  utilized  to  cover  mortgage  bonds 
for  more  than  one-tenth  of  the  total  value  of  the  mortgages 
used  as  cover  for  such  bonds  and  shall  not  exceed  one-half 
of  the  total  paid-up  capital  of  the  bank.  Mortgages  on  real 
estate  which  does  not  yield  a  permanent  income  shall  also  be 
excluded  from  those  mortgages  which  may  be  utilized  for 
securing  mortgage  bonds. 

Each  mortgage  which  serves  as  cover  for  the  issue  of  mort- 
gage bonds  shall  be  recorded  by  the  bank  in  a  special  register, 
which  shall  contain  a  complete  record  of  each  specific  operation. 
In  the  first  month  of  each  calendar  half  year  the  auditors  shall 
deliver  to  the  inspecting  authorities  a  certified  copy  of  the  mort- 
gages which  have  been  recorded  during  the  preceding  half  year, 
which  certified  copy  shall  remain  in  the  possession  of  the 
inspecting  authorities. 

Each  mortgage  bank  shall  appoint  an  auditor  and  an  assist- 
ant auditor.  The  appointment  shall  be  made  through  the  bank 
inspection  authorities  after  consultation  with  the  bank.  The 
inspecting  authorities  may  at  any  time  revoke  such  appointment. 
The  auditor  shall  satisfy  himself  that  the  necessary  cover  for 
the  mortgage  bonds   issued   is  at   all  times   existent.     He   shall 


AGRICULTURAL   CREDIT  165 

not,  however,  concern  himself  as  to  whether  these  securities 
have  really  the  value  given  to  them,  in  the  event  of  svich  prop- 
erties having  been  duh'  approved  and  certified  by  the  inspect- 
ing authorities.  The  auditor  shall  further  satisfy  himself  that 
the  mortgages  and  securities,  which  are  intended  to  cover  the 
issue  of  mortgage  bonds,  have  been  duly  entered  in  the  mort- 
gage register.  The  auditor  shall  certify  on  each  mortgage  bond, 
before  its  issue,  that  the  necessary  cover  is  existent  and  that  it 
has  been  duly  recorded  in  the  mortgage  register.  Mortgages 
or  securities  recorded  in  the  register  shall  only  be  removed 
therefrom  with  the  consent  of  the  auditor,  in  writing.  This 
may  be  effected  by  his  indorsement  of  the  mortgage  register. 
The  auditor,  together  with  the  bank,  has  the  custody  of  all 
documents  regarding  the  mortgages  and  securities  recorded  in 
the  register  and  such  money  as  serves  as  cover  for  the  mort- 
gage bonds.  He  may  only  hand  over  these  objects  to  the  bank 
in  conformity  with  the  provisions  of  the  law.  He  is  bound  on 
the  demand  of  the  bank  to  hand  over  the  mortgage  deeds  as  well 
as  the  securities  and  money,  and  to  cooperate  in  the  extinction 
of  the  record  of  such  securities  in  the  register  in  so  far  as  the 
remaining  mortgages  on  the  register  suffice  to  cover  the  mortgage 
bonds,  or  in  cases  where  the  bank  shall  create  other  securities. 
Should  the  bank  have  to  surrender  to  the  borrower  the  mort- 
gage deed  to  carry  out  the  operations  required  by  the  civil  code, 
the  auditor  shall  hand  over  the  deeds,  except  in  the  case  where 
the  exceptions  described  in  the  civil  code  exist.  When  a  mort- 
gage is  repaid  the  money  shall  be  handed  over  to  the  auditor  to 
.be  taken  care  of. 

Should  the  bank  temporarily  require  a  mortgage  deed  the 
auditor  shall  hand  it  over  without  the  bank's  being  bound  to 
provide  other  cover.  The  auditor  is  authorized  to  inspect  the 
books  and  writings  of  the  bank  at  all  times,  in  so  far  as  they 
refer  to  the  mortgage  bonds  and  the  mortgages  recorded  in  the 
mortgage  register.  A  mortgage  bank  is  bound  to  make  constant 
communication  to  the  auditor  of  the  repayment  of  the  capital  of 
the  mortgages  entered  in  the  register,  and  all  the  changes  regard- 
ing these  mortgages  which  concern  the  holders  of  mortgage 
bonds.  The  amount  of  the  honorarium  agreed  upon  shall  be 
communicated  to  the  inspecting  authorities ;  failing  an  agreement 
the  amount  shall  be  settled  by  the  inspecting  authorities  them- 


i66  SELECTED   ARTICLES 

selves.  Auditors  who  intentionally  do  anything  to  the  prejudice 
of  mortgage  bondholders  sluill  be  punished  for  betrayal  of  trust 
according  to  the  provisions  of  the  criminal  code. 

Whoever  knowingly  shall  issue  for  a  mortgage  bank  mort- 
gage bonds  above  the  amount  for  which  they  are  covered  by 
the  mortgages  and  securities  or  money  in  the  hands  of  the 
auditor  shall  be  punished  with  a  term  of  imprisonment  not 
exceeding  one  year  and  a  fine  not  exceeding  $5,000.  A  similar 
punishment  shall  be  given  to  any  person  who,  acting  on  behalf 
of  a  mortgage  bank,  shall  knowingly  sell  or  change  a  mortgage 
or  other  security  entered  in  the  register  of  the  bank  when  the 
remaining  mortgages  or  securities  inscribed  on  the  register  do 
not  suffice  to  cover  the  mortgage  bonds.  A  similar  punishment 
also  shall  be  given  to  any  person  who  shall  fail  to  observe  the 
law  by  not  handing  over  to  the  auditor  money  paid  in  redemp- 
tion of  a  mortgage.  If  there  are  extenuating  circumstances  only 
a  fine  may  be  inflicted.  Whoever  shall  issue  for  a  mortgage 
bank  a  mortgage  bond  which  does  not  bear  the  certificate  pro- 
vided by  law  shall  be  punished  by  a  fine  not  exceeding  $250, 
or  with  imprisonment  not  exceeding  three  months.  Nonob- 
servance  of  other  provisions  of  the  law  shall  be  punished  with 
a  fine  not  exceeding  $750. 

Conclusion  and  Recommendations 

With  this  brief  account  the  preliminary  report  on  European 
land  and  rural  credit  facilities  is  closed.  Enough  has  been  told, 
it  is  hoped,  to  show  the  working  principles  upon  which  they  are 
based.  No  more  has  been  attempted.  There  are  20  or  more 
nations  in  continental  Europe.  They  have  all  been  confronted 
by  the  problems  which  worn-out  soils  and  increasing  population 
have  finally  thrust  upon  'the  United  States,  and  each  has  pro- 
ceeded to  solve  these  problems  after  its  own  fashion  and  in 
ways  adapted  to  its  peculiar  conditions  and  customs.  How  well 
they  have  succeeded  is  attested  by  the  general  acknowledgment 
that  endurable  existence  of  their  teeming  millions  would  not  be 
possible  except  for  the  means  which  have  been  devised  for 
financing  the  farmer  and  landowner.  In  many  nations  where 
the  situation  was  desperate — more  desperate  than  can  ever  be 
feared  to  happen  in  America — the  state  intervened,  granting 
enormous  subsidies  and  free  use  of  money  for  agriculture.    In 


AGRICULTURAL   CREDIT  167 

other  nations  the  churches  and  pubHc-spirited  men,  endowed 
with  wonderful  energies,  have  directed  their  disinterested  efforts 
to  effect  combinations  for  associated  action.  But  these  are  sub- 
jects for  subsequent  investigation.  The  object  of  this  report  is 
to  present  the  plans  which  were  developed  by  the  farmers  them- 
selves, and  rest  upon  unassisted  and  independent  endeavor  for 
the  accomplishment  of  their  purpose. 

The  nation  that  furnishes  the  best  examples  of  this  kind  is 
Germany— the  birthplace  of  land  and  rural  credit  systems,  and 
where  to-day  they  have  reached  their  fullest  and  most  useful 
development.  As  explained  above  in  this  report,  cooperative 
credit,  real  and  personal,  started  in  German}-,  and  as  it  spread 
throughout  Europe  it  underwent  modifications.  But  these 
changes  were  corruptions  rather  than  improvements  of  the  origi- 
nal idea.  The  true  rural  credit  society  is  a  small  group  of 
farmers — the  smaller  the  better — intimately  known  to  each  other 
and  holding  themselves  liable  without  limit  for  their  associated 
obligations.  This  unlimited  liability  is  the  main  thing.  It  com- 
pels the  exercise  of  caution  in  the  selection  of  members  and  in- 
spires confidence  in  the  public  so  that  loans  may  be  obtained  up 
to  the  full  value  of  the  collective  guaranty.  In  most  nations 
such  societies  have  never  lost  a  cent,  while  the  losses  that  have 
occurred  in  all  Europe  for  the  last  30  years  are  too  trivial  to  be 
mentioned,  so  there  need  be  no  hesitation  in  adopting  the  un- 
limited-liability plan.  After  a  society  is  well  established  it  at- 
tracts deposits  from  members  and  outsiders.  It  becomes,  in  fact, 
a  little  loan  and  savings  bank,  with  funds  on  hand  sufficient  for 
its  operations  and  only  rarely  is  obliged  to  borrow  and  put  its 
collective  guaranty  to  the  test.  It  passes  from  the  role  of  a 
borrower  to  that  of  a  lender,  and  as  it  confines  this  function 
solely  to  its  members,  who  are  identical  with  itself,  no  profit 
is  sought,  interest  rates  are  reduced,  and  practically  no  risk  is 
incurred.  These  societies  in  Germany  are  so  sound  that  during 
panics  funds  have  been  withdrawn  from  commercial  banks  and 
deposited  with  them  for  safe-keeping,  and  at  times  thev  have 
had  more  money  than  they  knew  what  to  do  with. 

The  example  of  one  successful  society  encouraged  the  forma- 
tion of  other  societies  in  its  neighborhood.  In  every  nation  the 
movement  has  spread  rapidly  when  once  it  got  fairly  started. 
Two   hundred   new   central    societies    and   474    local    ones   were 


if,8  SELECTED    ARTICLES 

formed  in  Germany  last  year.  The  record  of  previous  years 
has  frequently  exceeded  this.  As  they  increase  in  number  they 
become  affiliated  according  to  geographical  or  political  divisions, 
and  organize  central  banks  for  exchange  purposes  and  to  con- 
nect them  with  the  general  banks.  This  is  the  natural  way  a 
system  is  developed.  It  can  not  be  begun  by  beginning  at  the 
top.  The  growth  must  be  voluntary,  prompted  by  necessity,  and 
based  on  the  small  local  units  self-managed  and  making  loans  to 
members  only.  Thus  was  the  great  German  system  evolved, 
the  statistics  of  which  have  been  cited  above.  The  12,000,000 
farmers  of  the  United  States  are  adding  over  $8,400,000,000  to 
the  national  wealth  each  year.  They  are  doing  this  on  a  bor- 
rowed capital  of  $6,040,000,000,  on  which  $510,000,000  of  interest 
is  annually  paid.  Counting  commissions  and  renewal  charges, 
the  rate  is  averaged  at  8^^  per  cent  for  this  country,  as  against 
y/2  or  43.'2  per  cent  for  Germany.  If  the  American  farmers  had 
a  thoroughly  organized  system  of  mutual  credit  societies  they 
would  not  only  save  this  difference  of  200  or  250 -millions  of 
dollars  to  themselves  individually,  but  in  course  of  time  the 
entire  debt  would  be  transferred  to  the  societies,  the  interest 
paid  to  them,  an  economic  waste  stopped,  and  this  stupendous 
sum  restored  to  agriculture.  The  assertion  is  neither  fanciful 
nor  extravagant.  It  is  below  the  actual  ratio  obtained  by  a 
comparison  with  the  German  figures. 

Too  much  emphasis  can  not  be  laid  on  the  fact  that  these 
small  credit  societies  are  not  organized  for  making  loans  on  real 
estate.  The  deposits  and  funds  received  by  them  are  withdraw- 
able on  short  notice.  This  privilege  must  be  allowed  in  order  to 
attract  the  capital  needed.  But  as  loans  to  members  yield  inter- 
est considerably  under  the  ordinary  marked  rate,  the  only  way 
they  have  of  paying  for  the  use  of  this  capital  is  by  making 
quick  and  numerous  turn-overs  with  it.  In  Germany  they  have 
taken  long-time  mortgages,  but  the  practice  is  strongly  denounced 
by  all  students  who  have  investigated  into  the  cause  of  the  re- 
markable success  of  the  Raiffeisen  and  Schulze-Delitzsche  sys- 
tems as  contrary  to  the  theory  on  which  they  are  founded. 
Credit  is  indispensable  to  every  business.  It  is  the  means  where- 
by $1  is  made  to  do  the  work  of  $50,  as  the  saying  goes,  but  its 
classifications  and  limitations  can  not  be  ignored  without  danger. 
A   loan    to   acquire   something   merely    for   consumption    is    not 


1 


AGRICULTURAL   CREDIT  169 

tolerated,  no  matter  what  may  be  the  security  offered.  The  loan 
must  be  strictly  for  a  creative  purpose.  This  is  the  first  cardinal 
principle,  and  so  rigorously  is  it  adhered  to  in  Europe  that  the 
credit  societies  invite  to  their  circle  only  those  who  are  pro- 
ducers of  wealth,  while  the  better  class  of  mortgage  banks  dis- 
countenance all  borrowing  except  for  the  purchase  or  the  im- 
provement of  real  estate.  Another  principle  is  that  personal  and 
real  credit  are  inherently  and  irreconcilably  separate  and  distinct, 
and  each  must  have  specially  adapted  institutions  for  carrying 
on  its  operations. 

The  recognition  and  observance  of  these  principles  have  done 
much  to  prevent  thriftless  debt  among  farmers,  and  are  un- 
doubtedly the  reasons  why  the  land  credit  is  so  thoroughly 
organized  on  the  European  Continent.  A  loan  on  chattel  or 
character  security  should  naturally  be  for  a  short  time  and  for 
temporary  purposes,  for  such  security  is  perishable  and  subject 
to  loss  or  change.  The  long-time  loan  requires  an  unchanging 
and  permanent  security,  and  the  only  thing  possessing  th's  qual- 
ity is  mother  earth  herself.  But  when  capital  is  once  sunk  in 
land  it  becomes  fixed  and  can  never  be  recovered  except  from 
the  income  created  thereby  or  the  amortization  sums  paid  in 
representation  of  that  income.  A  debtor  should  not  be  called 
upon  to  pay  back  the  loan  in  lump  or  in  advance  of  his  receipts 
from  the  land.  To  do  so  leads  only  to  further  borrowing, 
usually  on  more  burdensome  terms,  when  the  mortgage  expires. 
On  the  other  hand,  a  private  individual  can  not  be  expected  to 
take  his  money  back  in  driblets  or  wait  long  years  for  its  com- 
plete return.  So,  private  lending  on  real  estate  is  a  theoretical 
and  also  a  practical  wrong.  The  proof  of  this  lies  in  vast  num- 
bers of  foreclosures  and  the  excessive  interest  rates  of  farm 
mortgages  in  western  United  States,  where  they  are  largely  held 
by  persons.  The  smallness  of  the  annual  payments  and  the 
length  of  an  ordinary  loan  in  Europe  are  shown  in  the  tables 
of  the  Credit  Foncier,  which  have  been  included  in  this  report. 
A  glance  at  them  makes  it  apparent  that  amortization,  the  basic 
principle  of  a  land  loan,  can  be  brought  into  full  play  only  by 
the  aid  of  large  corporations  or  associations  with  charters  per- 
petual or  lasting  a  long  time. 

An  incorporated  body  has  a  further  advantage  over  private 
individuals   provided  it  gains  the  confidence  of  the  public  and 


170  SELECTED    ARTICLES 

carefully  preserves  the  sinking  fund  created  by  the  amortization 
payments.  It  can  issue  debentures  against  the  mortgages,  sell 
the  same,  and  so  immediately  recover  the  entire  capital  lent 
regardless  of  the  length  of  the  loan.  This  debenture  bond  by 
which  a  land  mortgage  is  made  fluid  was  invented,  as  has  been 
previously  mentioned,  by  the  German  Landschaften,  or  Ritter- 
schaften,  as  the  older  type  of  these  associations  are  called. 
Nothing  like  it  has  been  used  in  America.  By  rendering  amor- 
tization possible  it  brought  benefit  to  debtors.  As  it  runs  for 
long  periods,  50  to  75  years,  synchronously  with  the  loans,  and 
is  recallable  only  by  lot  or  option  of  the  maker,  the  issuing  banks 
can  not  be  embarrassed  by  sudden  withdrawals  of  money  during 
panics  or  at  inopportune  times,  and  from  the  standpoint  of  the 
lender  it  leaves  nothing  to  be  desired.  If  he  choose,  it  may  be 
drawn  payable  to  bearer  and  sold  and  transferred  by  the  simple 
act  of  delivery  without  legal  or  fiscal  expense,  thus  enabling  the 
holder  to  regain  the  whole  or  any  part  of  his  savings  practically 
at  will.  These  bonds  have  been  an  almost  perfect  security  for 
generations.  The  safeguards  thrown  around  them  by  law  make 
them  a  safe  and  sound  investment,  open  for  the  poor  as  well  as 
for  the  rich,  and  by  their  means  large  sums  and  petty  hoards 
have  been  collected  from  all  quarters  of  the  Continent  and  wisely 
used  for  the  improvement  of  land  and  the  development  of  agri- 
culture. It  should  be  noted  that  the  tendency  to  centralize  is  as 
strong  in  the  land-credit  organizations  as  in  the  rural  cooperative 
credit  systems  of  Europe.  All  the  nations  have  either  one  or 
only  a  few  banks.  In  Germany  a  central  bank  has  been  formed 
by  a  group  of  Landschaften  and  another  has  been  formed  for 
the  mortgage  banks.  The  local  concerns  arrange  the  loans  and 
send  the  documents,  including  the  mortgage  indorsed,  over  to 
the  central  banks,  which  issue  debentures  against  them  in  several 
languages.     They  are  sold  readily  in  foreign  markets. 

The  time  has  now  arrived  for  action  in  the  United  States. 
Very  little  now  can  be  gained  by  further  study  of  the  European 
field.  The  investigations  which  are  being  carried  on  through 
the  agencies  mentioned  in  this  report  have  already  gathered 
nearly  all  the  material  required  concerning  the  working  prin- 
ciples, business  methods,  and  achievements  of  the  farm  and  land- 
credit  systems ;  and  full  and  complete  information  will  soon  be 
available,  with  all  details.     The  rural  mutual-credit  societies,  as 


AGRICULTURAL    CREDIT  171 

is  well  known,  have  been  operating  successfully  as  far  back  as 
1862,  and  have  made  the  farmers  not  only  their  own  bankers, 
but  by  aiding  cooperation  in  all  its  branches  have  also  enabled 
them  to  become  their  own  merchants,  buying  supplies  at  whole- 
sale and  selling  produce  directly  in  all  the  nations  where  they 
flourish  the  best.  The  Landschaften  and  other  mortgage  insti- 
tutions have  evolved  the  true  theories  of  the  mortgage  loan — 
never  tried  in  America — and  have  made  real-estate  securities  so 
safe,  convertible,  and  cosmopolitan  that  in  Europe  they  sell  as 
readily  as  government  bonds,  and  thus  collect  and  distribute 
cheap  money  for  use  in  the  improvement  of  the  soil  and  devel- 
opment of  agriculture,  and  this  has  been  going  on  for  over  130 
years.  The  models  and  the  proof  of  their  worth  are  at  hand. 
With  some  modifications  they  could  be  easily  adapted  to  the 
agricultural  needs  of  many  parts  of  the  United  States. 

There  is  practically  no  limit  to  the  amount  of  capital  that 
could  be  advantageously  employed  for  rehabilitating  worn-out 
and  abandoned  farms,  opening  up  new  areas,  and  introducing 
modern  methods  of  cultivation ;  and  it  is  of  vital  importance 
that  this  capital  be  obtainable  at  once  in  sufficient  volume  and 
on  easy  terms.  The  world-wide  problem  caused  by  the  pressure 
of  population  upon  the  means  of  subsistence  now  confronts  the 
United  States  in  the  very  face  of  its  matchless  natural  resources 
and  vast  acreage  of  arable  lands  still  remaining  untouched  by 
the  plow.  The  $385,000,000  of  foodstuffs  exported  last  year 
barely  equaled  76  per  cent  of  the  annual  interest  charges  on 
the  debts  the  farmers  owe. 

The  cause  of  the  trouble  is  the  lack  of  capital,  and  the 
remedy  lies  in  financing  the  farmer  and  the  landowner.  This  is 
the  indisputable  conclusion  logically  reached  from  examination 
into  the  actual  conditions  and  from  comparisons  furnished  by 
recent  European  history.  The  solution  of  the  problem  concerns 
the  general  welfare  as  much  as  does  the  currency  and  mone- 
tary reform,  and  it  is  gratifying  to  note  that  it  seems  destined 
to  go  side  by  side  along  with  this  undertaking.  For  as  soon 
as  the  alarm  was  sounded  the  best  talent  of  the  nation  became 
enlisted,  and  bankers,  merchants,  professional  men,  legislators, 
and  private  individuals  in  town  and  country,  many  impelled  purely 
by  patriotic  and  disinterested  motives,  have  combined  their  efforts 
to  better  the  situation  before  it  pass  to  the  acute  and  critical  stage. 


\T2.  SELECTED    ARTICLES 

The  establishment  of  ajrricultiiral  cooperative  credit  associ- 
ations is  largely  a  matter  for  state  legislation  and  encourage- 
ment. The  making  and  the  management  of  these  little  societies 
are  so  simple  and  their  success  so  inevitable,  where  the  environ- 
ment is  congenial  to  tlitir  growtli,  that  without  doubt  they  would 
spring  up  in  multitudes  as  soon  as  the  proper  laws  were  passed, 
and  in  course  of  time  develop  systems  as  large  and  effective  as 
those  of  Germany.  A  great  many  cooperative  stores  already 
exist  in  this  country.  Cooperation  has  been  taught  by  farmers' 
journals  for  years,  and  the  spirit  of  it  is  in  the  air.  The  or- 
ganization of  land  credit,  however,  is  a  complicated  task,  espe- 
cially since  the  idea  is  new  in  the  United  States,  and  involved 
in  a  tangle  of  conflicting  state  laws  and  antiquated  land-registra- 
tion and  taxation  systems  and  foreclosure  procedures.  Many 
changes,  amendments,  and  additions  would  have  to  be  made 
in  respect  to  all  these  before  the  way  could  be  made  clear  for 
the  formation  of  land-mortgage  banks.  In  addition  to  the  uni- 
formity of  laws,  uniformity  of  business  methods  must  also 
he  brought  about.  This  means  statutory  regulations  and  limita- 
tions such  as  have  been  described  in  this  report ;  and  also 
ofificial  supervision.  But  this  supervision  need  be  not  the 
bureaucratic  kind  of  Europe,  but  similar  to  that  exercised  in 
the  United  States  over  national  banks,  savings  banks,  and  public- 
utility  corporations.  Free  scope  for  private  enterprise  and  initi- 
ative should  be  allowed  and  encouraged,  but  the  days  of  "wild- 
catting"  in  the  United  States  are  gone  for  good,  and  promoters 
should  never  again  be  given  the  opportunity  to  exploit  the 
necessities  of  debtors  and  prey  upon  the  public  as  was  done 
during  the  farm-mortgage  craze  i8  or  20  years  ago. 

The  only  instrument  by  which  land-mortgage  banks  can 
finance  themselves,  draw  money  from  the  public  for  investment 
in  loans,  are  the  debenture  bonds,  but  these  bonds  will  not  cir- 
culate freely  nor  far  from  the  place  of  issue  unless  they  are 
known  to  have  the  same  underlying  values  and  give  the  same 
rights  to  the  holder,  regardless  of  whether  they  be  secured  by 
mortgages  in  Texas,  Massachusetts,  or  in  any  other  states.  But 
possessed  of  these  characteristics  as  guaranties  of  law,  there  is 
no  reason  why  debentures  of  large  mortgage  banks  and  Land- 
schaften  should  not  be  listed  in  stock  markets  and  sold,  negoti- 
ated, and  exchanged  as  readily  as  railway  and  municipal  securi- 


AGRICULTURAL   CREDIT  173 

ties,    and   thus    equalize    and    reduce   interest    rates    for    farmers 
throughout  the  country. 

The  objects  of  the  investigations  set  on  foot  by  the  Depart- 
ments of  State  and  Agriculture  have  been  accomplished.  The 
public  is  aroused,  and  the  movement  has  finally  been  started  for 
organizing  the  land  credit  and  improving  agricultural-credit 
facilities  in  the  United  States.  The  nonpartisan  character  of 
the  interest  awakened  clearly  indicates  the  next  step  to  be  taken. 
The  persons  foremost  in  this  movement  should  get  together, 
open  headquarters  at  some  convenient  place  in  the  Middle  West, 
systematize  the  work  of  propaganda,  and  see  that  it  advance 
along  similar  lines  in  all  the  states.  Special  conventions  should 
be  held  in  those  states  where  the  needs  are  most  urgent.  Later 
on  a  national  convention  should  be  assembled  or  at  least  a 
national  committee  appointed  to  sit  in  continuous  session.  Every 
effort  should  be  made  to  secure  the  uniformity  so  much  to  be 
desired  in  state  laws,  and  to  give  a  proper  direction  to  any 
federal  legislation  which  should  be  proposed.  Such  is  the  recom- 
mendation of  this  report. 


North  American  Review.     199: 585-8.     April,   1914. 

What  Is  Agricultural  Credit?     R.  B.  Van  Cortlandt. 

Agricultural  Credit  is  something  vitally  interesting  to  every 
citizen  of  this  country.  The  term  is  new  here,  but  the  thing 
itself  is  so  urgently  needed  that  we  must  have  it  in  some  form 
if  our  people  are  to  remain  prosperous — if,  indeed,  we  are  to 
continue  to  live.  Various  European  nations,  with  soil  naturally 
inferior  to  ours,  have  established  Agricultural  Credit  and  thereby 
have  greatly  eased  the  burden  of  the  cost  of  living.  Hitherto 
we  have  lived  on  the  bountiful  overflow  of  our  rich  land,  and 
the  pinch  of  necessity  has  not  been  felt ;  but  now  our  population 
has  grown  enormous,  our  standards  of  living  have  been  greatly 
raised,  and  our  land  is  showing  the  effect  of  generations  of 
taking  out  with  very  little  putting  back.  We  must  do  better  or 
suffer. 

How  will  Agricultural  Credit  help  us?  Speaking  generally 
it  will  make  life  easier  and  better  for  all  of  us  by  increasing  the 
yield  of  the  land.     And  this  will  be  done  first,  by  placing  agri- 


174  SELECTED   ARTICLES 

culture  on  a  better  business  basis ;  second,  by  mobilizing  land  and 
land  mortgages ;  and  third,  by  establishing  financial  institutions 
in  which  the  prime  interest  will  be  that  of  the  borrower — not 
that  of  the  lender.  If  this  programme  seems  Utopian,  the  best 
reply  is  that  its  aims  have  been  already  realized  with  great  gain 
in  Europe,  notably  in  Germany  and  France. 

Hitherto  the  American  farmer  has  not  been  a  bookkeeper. 
His  work  is  hard,  and  when  the  day  is  done  he  does  not  care 
to  reckon  up  accounts.  If  at  the  end  of  the  year  the  unpaid 
bills  are  not  too  heavy,  and  if  the  farm  buildings,  stock,  tools, 
etc.,  are  in  fair  shape,  he  is  satisfied.  That  was  the  practice 
of  the  fathers,  and  it  answered  for  their  time ;  but  to-day  we 
are  confronted  with  conditions  that  demand  vast  improvement 
in  our  methods  if  we  hope  to  survive.  Our  grain  and  our  cattle 
used  to  feed  a  large  part  of  Europe.  They  do  not  now — or  at 
least  our  food  exports  are  but  a  fraction  of  what  they  used  to 
be.  We  must  not  only  replace  the  elements  of  fertility  in  the 
land,  but  we  must  practice  more  intensive  cultivation. 

These  things  cost  money.  The  initial  investment  must  be 
large.  The  question  then  arises  is  the  American  farmer,  so  long 
used  to  easy-going  methods,  to  get  hold  of  the  large  sums  he 
needs  for  betterments?  By  the  installation  of  Agricultural 
Credit,  farming  will  not  only  be  made  more  profitable,  but  it  will 
in  the  end  make  country  life  more  attractive,  so  that  our  young 
people  will  remain  on  the  land,  and  thereby  check  the  present 
tendency  to  flock  to  the  cities.  The  banking  system  of  to-day 
is  adapted  to  the  needs  of  manufacture  and  commerce.  The 
processes  of  nature  are  so  much  slower,  however,  that  banking 
for  farmers  must  be  organized  on  a  basis  of  credit  for  much 
longer  periods. 

Our  present  system  of  borrowing  on  land  is  by  mortgages 
running  from  three  to  five  years,  the  entire  principal  coming  due 
at  one  time.  This  is  expensive,  involving  renewals,  and  danger- 
ous from  the  possibility  of  the  mortgage  falling  due  at  a  time 
of  restricted  credit  so  that  it  cannot  be  renewed.  On  the  conti- 
nent of  Europe  this  business  is  handled  by  so-called  land- 
mortgage  banks,  or  rather  associations.  These  associations  are 
formed  along  varying  lines,  some  with  stock  like  the  great  French 
institution,  the  Credit  Fonder;  some  having  no  stock,  like  the 
German    Landschaften;    some   being   guaranteed    by   a    state    or 


AGRICULTURAL   CREDIT  175 

province,  as  in  Austria ;  while  the  principal  one  in  Hungary  com- 
bines ingeniously  various  features  peculiar  to  itself.  These  in- 
stitutions are  formed  along  certain  general  fundamental  lines  as 
follows : 

The  mortgages  granted  are  pledged  for  the  security  of  bonds 
which  the  institution  issues  and  sells  in  the  general  market. 
These  bonds  have  no  fixed  maturity,  but  can  be  retired  at  par 
or  some  small  premium  at  any  time.  When  the  borrower  mort- 
gages his  land  to  the  bank  he  agrees  to  pay  a  certain  fixed  sum 
semi-annually.  This  is  called  the  "Annuity"  and  is  composed  of 
the  annual  interest  plus  an  amount,  generally  one-half  per  cent, 
toward  the  reduction  of  the  principal  of  the  debt  and  known  as 
"Amortization,"  and  an  additional  amount,  about  one-quarter 
per  cent,  toward  the  expenses  of  the  bank.  The  borrower,  there- 
fore, at  once  begins  to  extinguish  the  principal  of  the  debt ;  and 
as  each  year  the  principal  decreases,  the  interest,  of  course,  de- 
creases also,  and,  the  annuity  being  fixed,  the  proportion  of  it 
applicable  toward  the  extinction  of  the  mortgage  increases. 
Thus  it  happens  that,  beginning  with  a  payment  of  one-half 
toward  principal,  the  mortgage  bearing  four  per  cent  to  four  and 
one-half  per  cent,  which  are  the  general  rates,  the  entire  debt 
is  extinguished  in  between  fifty  and  sixty  years. 

The  borrower  has  the  right  at  any  time  to  pay  off  the  mort- 
gage, a  small  penalty  being  generally  exacted ;  but  the  lending 
institution  cannot  require  payment  from  the  mortgagor,  thus 
guarding  against  any  higher  rate  of  interest  being  exacted  dur- 
ing the  life  of  the  loan ;  whereas,  should  interest  rates  fall, 
the  borrower  can  anticipate  the  payment  of  the  mortgage  and 
secure  the  benefit  of  the  lower  rate  of  interest.  If  payment 
of  a  mortgage  is  anticipated,  or  when  the  semiannual  payments 
are  received  by  the  bank,  it  enters  the  market  and  buys  or  retires 
a  corresponding  amount  of  its  bonds,  so  that  its  outstanding 
bonds  never  exceed  in  the  aggregate  the  total  of  the  mortgages 
it  holds  against  them.  This  has  also  the  advantage  of  making  a 
constant  market  for  the  bonds,  and  there  is  no  necessity  of  sink- 
ing-funds for  special  mortgages,  as  they  are  under  a  general 
pledge.    These  banks  do  not  compete  with  the  commercial  banks. 

The  mortgaging  of  land  is  known  as  long-term  credit,  and 
it  may  be  handled,  as  stated  above,  by  joint-stock  institutions 
or  by  associations  of  borrowers,  the  nature  of  the  business  being 


176  SELECTED   ARTICLES 

such  that  both  forms  of  institutions  have  advantages  and  de- 
fects which  may  make  the  one  form  more  adaptable  to  one  com- 
munity and  the  other  form  more  adaptable  to  another;  but  in 
institutions  furnishing  the  credit  required  by  farmers  for  work- 
ing capital,  such  as  the  purchase  of  seeds,  fertilizer,  payment  for 
labor,  etc.,  which  is  known  as  short-term  credit,  the  third  aim 
referred  to — that  the  borrower  should  be  primarily  considered 
rather  than  the  lender — assumes   fundamental   importance. 

On  the  continent  of  Europe  a  solution  is  found  in  the  organ- 
ization of  banks  by  the  application  of  so-called  co-operative 
principles.  The  purpose  is  to  provide  organizations  in  which 
the  borrower  receives  consideration  rather  than  the  lender,  also 
to  keep  the  money  of  any  body  of  individuals  for  the  use  of 
that  body.  Under  our  present  system  a  great  deal  of  money 
belonging  to  farmers  finds  its  way  into  Wall  Street.  At  present 
the  lenders  are  organized;  whereas  the  borrower  stands  alone. 
In  a  joint-stock  bank  the  primary  consideration  is  that  of  the 
stockholders. 

The  initial  capital  is  secured  by  entrance  fees  and  subscription 
to  shares  wherein  the  principle  of  limited  liability  is  adopted ; 
or,  if  there  are  no  shares,  resort  must  be  had  to  the  principle  of 
unlimited  liability — i.  e.,  the  equal  and  unlimited  liability  of  all 
members  who  join  the  bank  for  every  obligation  the  bank  may 
contract. 

After  the  co-operative  bank  is  formed,  the  problem  of  se- 
curing funds  to  loan  is,  of  course,  the  chief  one ;  but,  as  one  of 
the  principles  followed  is  to  limit  dividends  on  the  stock  to 
four  or  five  per  cent,  a  reserve  can  be  gradually  accumulated. 
Deposits  come  in  as  it  is  seen  that  the  bank  is  doing  a  safe  busi- 
ness, all  speculative  business  being  avoided.  Other  important 
features  are  that  every  stockholder  has  but  one  vote,  no  matter 
how  many  shares  he  owns ;  it  is  provided  that  no  person  shall 
own  more  than  a  certain  number  of  shares,  generally  ten  per 
cent;  and  another  absolutely  essential  feature,  where  the  bank 
is  formed  with  unlimited  liability,  is  that  the  area  in  which 
it  operates  shall  be  so  restricted  that  the  members  can  all  know 
and  watch  one  another.  The  loans  must  be  for  a  productive 
purpose  and  not,  for  instance,  for  living  expenses,  so  that  when 
the  purpose  sought  has  had  time  to  accomplish  the  results 
aimed  at,  varying  in  agriculture  from  six  months  to  two  or  three 


AGRICULTURAL   CREDIT  177 

years,  the  borrower  will  receive  funds  to  liquidate  the  loan. 
Loans  are  granted  only  to  members  of  the  bank,  although  de- 
posits are  accepted   from  outsiders. 

The  chief  difficulty  is  that  of  securing  funds  sufficient  to 
supply  the  needs  of  borrowers;  therefore  the  advisability  of 
forming  a  central  bank  for  a  group  of  local  banks  was  clearly 
seen.  The  central  bank  acts  as  a  clearing-house  for  the  funds 
of  the  local  banks,  some  of  which  have  a  surplus  of  deposits 
above  the  loan  requirements  of  their  neighborhood.  In  addi- 
tion, the  central  bank,  being  an  institution  with  ver\'  consider- 
able resources,  is  in  a  position  to  do  business  with  the  large 
commercial  banks  and  with  the  Government  banks  of  issue  which 
exist  practically  in  all  European  countries.  That  this  whole 
system  of  co-operative  banks  is  of  no  mean  proportions  is  at 
once  shown  by  the  fact  that  in  Germany,  for  instance,  their  de- 
posits amount  to  nearly  $500,000,000,  and  the  turnover  of  thirty- 
six  out  of  forty  central  banks  in  1910  was  about  $2,000,000,000. 


UC  SOUTHl  m  RtGIUNAL  LIBRARY  FACILITY 


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